[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2019 Edition]
[From the U.S. Government Publishing Office]
[[Page i]]
Title 26
Internal Revenue
________________________
Parts 2 to 29
Revised as of April 1, 2019
Containing a codification of documents of general
applicability and future effect
As of April 1, 2019
Published by the Office of the Federal Register
National Archives and Records Administration as a
Special Edition of the Federal Register
[[Page ii]]
U.S. GOVERNMENT OFFICIAL EDITION NOTICE
Legal Status and Use of Seals and Logos
The seal of the National Archives and Records Administration
(NARA) authenticates the Code of Federal Regulations (CFR) as
the official codification of Federal regulations established
under the Federal Register Act. Under the provisions of 44
U.S.C. 1507, the contents of the CFR, a special edition of the
Federal Register, shall be judicially noticed. The CFR is
prima facie evidence of the original documents published in
the Federal Register (44 U.S.C. 1510).
It is prohibited to use NARA's official seal and the stylized Code
of Federal Regulations logo on any republication of this
material without the express, written permission of the
Archivist of the United States or the Archivist's designee.
Any person using NARA's official seals and logos in a manner
inconsistent with the provisions of 36 CFR part 1200 is
subject to the penalties specified in 18 U.S.C. 506, 701, and
1017.
Use of ISBN Prefix
This is the Official U.S. Government edition of this publication
and is herein identified to certify its authenticity. Use of
the 0-16 ISBN prefix is for U.S. Government Publishing Office
Official Editions only. The Superintendent of Documents of the
U.S. Government Publishing Office requests that any reprinted
edition clearly be labeled as a copy of the authentic work
with a new ISBN.
U . S . G O V E R N M E N T P U B L I S H I N G O F F I C E
------------------------------------------------------------------
U.S. Superintendent of Documents Washington, DC
20402-0001
http://bookstore.gpo.gov
Phone: toll-free (866) 512-1800; DC area (202) 512-1800
[[Page iii]]
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........................ 753
Alphabetical List of Agencies Appearing in the CFR...... 773
Table of OMB Control Numbers............................ 783
List of CFR Sections Affected........................... 801
[[Page iv]]
----------------------------
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
revision date (in this case, April 1, 2019), consult the ``List of CFR
Sections Affected (LSA),'' which is issued monthly, and the ``Cumulative
List of Parts Affected,'' which appears in the Reader Aids section of
the daily Federal Register. These two lists will identify the Federal
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
Register since the last revision of that volume of the Code. Source
citations for the regulations are referred to by volume number and page
number of the Federal Register and date of publication. Publication
dates and effective dates are usually not the same and care must be
exercised by the user in determining the actual effective date. In
instances where the effective date is beyond the cut-off date for the
Code a note has been inserted to reflect the future effective date. In
those instances where a regulation published in the Federal Register
states a date certain for expiration, an appropriate note will be
inserted following the text.
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
amendments to existing regulations in the CFR. These OMB numbers are
placed as close as possible to the applicable recordkeeping or reporting
requirements.
PAST PROVISIONS OF THE CODE
Provisions of the Code that are no longer in force and effect as of
the revision date stated on the cover of each volume are not carried.
Code users may find the text of provisions in effect on any given date
in the past by using the appropriate List of CFR Sections Affected
(LSA). For the convenience of the reader, a ``List of CFR Sections
Affected'' is published at the end of each CFR volume. For changes to
the Code prior to the LSA listings at the end of the volume, consult
previous annual editions of the LSA. For changes to the Code prior to
2001, consult the List of CFR Sections Affected compilations, published
for 1949-1963, 1964-1972, 1973-1985, and 1986-2000.
``[RESERVED]'' TERMINOLOGY
The term ``[Reserved]'' is used as a place holder within the Code of
Federal Regulations. An agency may add regulatory information at a
``[Reserved]'' location at any time. Occasionally ``[Reserved]'' is used
editorially to indicate that a portion of the CFR was left vacant and
not accidentally dropped due to a printing or computer error.
INCORPORATION BY REFERENCE
What is incorporation by reference? Incorporation by reference was
established by statute and allows Federal agencies to meet the
requirement to publish regulations in the Federal Register by referring
to materials already published elsewhere. For an incorporation to be
valid, the Director of the Federal Register must approve it. The legal
effect of incorporation by reference is that the material is treated as
if it were published in full in the Federal Register (5 U.S.C. 552(a)).
This material, like any other properly issued regulation, has the force
of law.
What is a proper incorporation by reference? The Director of the
Federal Register will approve an incorporation by reference only when
the requirements of 1 CFR part 51 are met. Some of the elements on which
approval is based are:
(a) The incorporation will substantially reduce the volume of
material published in the Federal Register.
(b) The matter incorporated is in fact available to the extent
necessary to afford fairness and uniformity in the administrative
process.
(c) The incorporating document is drafted and submitted for
publication in accordance with 1 CFR part 51.
What if the material incorporated by reference cannot be found? If
you have any problem locating or obtaining a copy of material listed as
an approved incorporation by reference, please contact the agency that
issued the regulation containing that incorporation. If, after
contacting the agency, you find the material is not available, please
notify the Director of the Federal Register, National Archives and
Records Administration, 8601 Adelphi Road, College Park, MD 20740-6001,
or call 202-741-6010.
CFR INDEXES AND TABULAR GUIDES
A subject index to the Code of Federal Regulations is contained in a
separate volume, revised annually as of January 1, entitled CFR Index
and Finding Aids. This volume contains the Parallel Table of Authorities
and Rules. A list of CFR titles, chapters, subchapters, and parts and an
alphabetical list of agencies publishing in the CFR are also included in
this volume.
[[Page vii]]
An index to the text of ``Title 3--The President'' is carried within
that volume.
The Federal Register Index is issued monthly in cumulative form.
This index is based on a consolidation of the ``Contents'' entries in
the daily Federal Register.
A List of CFR Sections Affected (LSA) is published monthly, keyed to
the revision dates of the 50 CFR titles.
REPUBLICATION OF MATERIAL
There are no restrictions on the republication of material appearing
in the Code of Federal Regulations.
INQUIRIES
For a legal interpretation or explanation of any regulation in this
volume, contact the issuing agency. The issuing agency's name appears at
the top of odd-numbered pages.
For inquiries concerning CFR reference assistance, call 202-741-6000
or write to the Director, Office of the Federal Register, National
Archives and Records Administration, 8601 Adelphi Road, College Park, MD
20740-6001 or e-mail [email protected].
SALES
The Government Publishing Office (GPO) processes all sales and
distribution of the CFR. For payment by credit card, call toll-free,
866-512-1800, or DC area, 202-512-1800, M-F 8 a.m. to 4 p.m. e.s.t. or
fax your order to 202-512-2104, 24 hours a day. For payment by check,
write to: US Government Publishing Office - New Orders, P.O. Box 979050,
St. Louis, MO 63197-9000.
ELECTRONIC SERVICES
The full text of the Code of Federal Regulations, the LSA (List of
CFR Sections Affected), The United States Government Manual, the Federal
Register, Public Laws, Public Papers of the Presidents of the United
States, Compilation of Presidential Documents and the Privacy Act
Compilation are available in electronic format via www.ofr.gov. For more
information, contact the GPO Customer Contact Center, U.S. Government
Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free). E-
mail, [email protected].
The Office of the Federal Register also offers a free service on the
National Archives and Records Administration's (NARA) World Wide Web
site for public law numbers, Federal Register finding aids, and related
information. Connect to NARA's web site at www.archives.gov/federal-
register.
The e-CFR is a regularly updated, unofficial editorial compilation
of CFR material and Federal Register amendments, produced by the Office
of the Federal Register and the Government Publishing Office. It is
available at www.ecfr.gov.
Oliver A. Potts,
Director,
Office of the Federal Register.
April 1, 2019.
[[Page ix]]
THIS TITLE
Title 26--Internal Revenue is composed of twenty-two volumes. The
contents of these volumes represent all current regulations issued by
the Internal Revenue Service, Department of the Treasury, as of April 1,
2019. The first fifteen volumes comprise part 1 (Subchapter A--Income
Tax) and are arranged by sections as follows: Sec. Sec. 1.0-1.60;
Sec. Sec. 1.61-1.139; Sec. Sec. 1.140-1.169; Sec. Sec. 1.170-1.300;
Sec. Sec. 1.301-1.400; Sec. Sec. 1.401-1.409; Sec. Sec. 1.410-1.440;
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
sixteenth 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, Ann Worley was Chief Editor. The Code of Federal
Regulations publication program is under the direction of John Hyrum
Martinez, assisted by Stephen J. Frattini.
[[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
[[Page 3]]
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....... 76
5e Temporary income tax regulations, travel
expenses of Members of Congress......... 78
5f Temporary income tax regulations under the
Tax Equity and Fiscal Responsibility Act
of 1982................................. 81
6a Temporary regulations under title II of the
Omnibus Reconciliation Act of 1980...... 85
7 Temporary income tax regulations under the
Tax Reform Act of 1976.................. 110
8 Temporary income tax regulations under
section 3 of the Act of October 26, 1974
(Pub. L. 93-483)........................ 122
9 Temporary income tax regulations under the
Tax Reduction Act of 1975............... 123
11 Temporary income tax regulations under the
Employee Retirement Income Security Act
of 1974................................. 125
12 Temporary income tax regulations under the
Revenue Act of 1971..................... 133
13 Temporary income tax regulations under the
Tax Reform Act of 1969.................. 143
15 Temporary income tax regulations relating to
exploration expenditures in the case of
mining.................................. 144
15a Temporary income tax regulations under the
Installment Sales Revision Act.......... 148
16A Temporary income tax regulations relating to
the partial exclusion for certain
conservation cost-sharing payments...... 167
[[Page 4]]
18 Temporary income tax regulations under the
Subchapter S Revision Act of 1982....... 175
SUBCHAPTER B--ESTATE AND GIFT TAXES
20 Estate tax; estates of decedents dying after
August 16, 1954......................... 177
22 Temporary estate tax regulations under the
Economic Recovery Tax Act of 1981....... 501
25 Gift tax; gifts made after December 31, 1954 502
26 Generation-skipping transfer tax regulations
under the Tax Reform Act of 1986........ 685
27-29
[Reserved].Q??
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).
[[Page 9]]
(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.
(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
[[Page 10]]
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 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
[[Page 11]]
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.
(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
[[Page 12]]
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 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''
[[Page 13]]
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 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
[[Page 14]]
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 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]
[[Page 15]]
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 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
[[Page 16]]
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. 2.1-3, 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:
[[Page 17]]
(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 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
[[Page 18]]
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 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
[[Page 19]]
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 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
[[Page 20]]
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 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
[[Page 21]]
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.
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
[[Page 22]]
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 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),
[[Page 23]]
(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--
(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
[[Page 24]]
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 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
[[Page 25]]
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--
(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
[[Page 26]]
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.
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
[[Page 27]]
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 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)
[[Page 28]]
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 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,
[[Page 29]]
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 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
[[Page 30]]
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 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
[[Page 31]]
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 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
[[Page 32]]
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-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
[[Page 33]]
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, 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
[[Page 34]]
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 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)
[[Page 35]]
(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 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
[[Page 36]]
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) (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,
[[Page 37]]
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 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-
[[Page 38]]
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 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]
[[Page 39]]
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 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
[[Page 40]]
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.
(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
[[Page 41]]
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--
(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
[[Page 42]]
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.
(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.
[[Page 43]]
(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.
(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.
[[Page 44]]
(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
(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
[[Page 45]]
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 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
[[Page 46]]
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
(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
[[Page 47]]
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 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
[[Page 48]]
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, 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
[[Page 49]]
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 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
[[Page 50]]
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 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
[[Page 51]]
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.
(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
[[Page 52]]
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
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
[[Page 53]]
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 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.
[[Page 54]]
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). 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
[[Page 55]]
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
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
[[Page 56]]
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 (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.
[[Page 57]]
(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
(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
[[Page 58]]
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. 1.954-1T(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
[[Page 59]]
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 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
[[Page 60]]
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 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
[[Page 61]]
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 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
[[Page 62]]
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 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)
[[Page 63]]
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
(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
[[Page 64]]
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 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
[[Page 65]]
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 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).
[[Page 66]]
(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).
(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
[[Page 67]]
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 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
[[Page 68]]
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 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,
[[Page 69]]
(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,
(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.
[[Page 70]]
(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 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
[[Page 71]]
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 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
[[Page 72]]
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 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
[[Page 73]]
(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 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
[[Page 74]]
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 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.
5.1502-45 Limitation on losses to amount at risk.
5.6411-1 Tentative refund under claim of right adjustment.
Authority: 26 U.S.C. 7805.
Sec. 5.1502-45 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.
[[Page 75]]
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 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
[[Page 76]]
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 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.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
[[Page 77]]
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.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.
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
[[Page 78]]
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]
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).
[[Page 79]]
(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 80]]
[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 81]]
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 days x $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 days x [\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.163-1 Denial of interest deduction on certain obligations issued
after December 31, 1982, unless issued in registered form.
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.
[[Page 82]]
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:
Example (1). Municipality X publicly offers its general debt
obligations to United States
[[Page 83]]
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.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
[[Page 84]]
``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.
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
[[Page 85]]
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]
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
[[Page 86]]
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 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.
[[Page 87]]
(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 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.
[[Page 88]]
(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.
(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
[[Page 89]]
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 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.
[[Page 90]]
(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, 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--
[[Page 91]]
(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 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
[[Page 92]]
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:
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
[[Page 93]]
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).
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.,
[[Page 94]]
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 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;
[[Page 95]]
(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 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
[[Page 96]]
(``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 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):
[[Page 97]]
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,
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
[[Page 98]]
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 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,
[[Page 99]]
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 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
[[Page 100]]
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.
(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
[[Page 101]]
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 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
[[Page 102]]
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.
(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
[[Page 103]]
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 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.
[[Page 104]]
(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 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).
[[Page 105]]
(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 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
[[Page 106]]
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 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
[[Page 107]]
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 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
[[Page 108]]
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 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
[[Page 109]]
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)........................
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 day x 230 days)......... $5,750
[[Page 110]]
For each failure to furnish a statement required by section 19,250
6039C(b)(3) ($25 per day x 10 statements x the 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 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.
7.465-1 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.
7.936-1 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.
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
[[Page 111]]
(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) 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
[[Page 112]]
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 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,
[[Page 113]]
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 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]
[[Page 114]]
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.
(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. 7.465-1 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 31, 1975, (for the purposes of Sec. 7.465-1
through 7.465-5 such first day shall be
[[Page 115]]
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 116]]
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. 7.936-1 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]
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
[[Page 117]]
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
(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
[[Page 118]]
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, 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
[[Page 119]]
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, 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
[[Page 120]]
(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 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
[[Page 121]]
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 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
[[Page 122]]
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]
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
[[Page 123]]
placed in a separate trust as of the date of the amendment.
[T.D. 7393, 40 FR 58853, Dec. 19, 1975]
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--
[[Page 124]]
(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
(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]
[[Page 125]]
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.
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,
[[Page 126]]
for each participant or for all participants or reasonable groupings of
participants, if such determination does not result in discrimination in
favor of 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,
[[Page 127]]
unless the participant has made an election under paragraph (c) of this
section.
(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.
[[Page 128]]
(v) Form of election. The election shall be in writing and clearly
indicate that the participant is electing the joint and survivor annuity
form.
(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
[[Page 129]]
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 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
[[Page 130]]
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 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. 11.408(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 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
[[Page 131]]
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 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
[[Page 132]]
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 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
[[Page 133]]
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 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
[[Page 134]]
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 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
[[Page 135]]
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 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
[[Page 136]]
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 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
[[Page 137]]
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 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
[[Page 138]]
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 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.
[[Page 139]]
(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 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
[[Page 140]]
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 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
[[Page 141]]
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 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--
[[Page 142]]
(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.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
[[Page 143]]
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.
13.0-13.9 [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. 13.0-13.9 [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 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
[[Page 144]]
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 145]]
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 146]]
(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 147]]
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 148]]
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 149]]
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 150]]
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 151]]
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 152]]
$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 ($400,000 x 1). 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 153]]
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 154]]
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 155]]
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 156]]
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 ($8,227,000 x
57.18176%) 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 157]]
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 158]]
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 159]]
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 160]]
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 161]]
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 162]]
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 163]]
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 164]]
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 165]]
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 166]]
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 167]]
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 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.
[[Page 168]]
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.
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
[[Page 169]]
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) 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
($690,000 x .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............................ x 500,000
-----------
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
[[Page 170]]
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)
(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--
[[Page 171]]
(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 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
[[Page 172]]
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 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
[[Page 173]]
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 (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
[[Page 174]]
$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 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.
[[Page 175]]
(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 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
[[Page 176]]
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--
(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.
[[Page 177]]
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.
20.2001-2 Valuation of adjusted taxable gifts for purposes of
determining the deceased spousal unused exclusion amount of
last deceased spouse.
20.2002-1 Liability for payment of tax.
20.2010-0 Table of contents.
20.2010-1 Unified credit against estate tax; in general.
20.2010-2 Portability provisions applicable to estate of a decedent
survived by a spouse.
20.2010-3 Portability provisions applicable to the surviving spouse's
estate.
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 178]]
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 179]]
20.2106-2 Estates of nonresidents not citizens; deductions for expenses,
losses, etc.
20.2107-1 Expatriation to avoid tax.
Miscellaneous
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.
[[Page 180]]
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.
20.7701-2 Definitions; spouse, husband and wife, husband, wife,
marriage.
Authority: 26 U.S.C. 7805.
Section 20.2010-0 also issued under 26 U.S.C. 2010(c)(6).
Section 20.2010-1 also issued under 26 U.S.C. 2010(c)(6).
Section 20.2010-2 also issued under 26 U.S.C. 2010(c)(6).
Section 20.2010-3 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
[[Page 181]]
their admission as States. See section 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.
20.2203-1 through 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; T.D. 9849, 84 FR 9238, Mar. 14, 2019]
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
[[Page 182]]
transferred by the decedent during his 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 183]]
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. 20.2001-2 Valuation of adjusted taxable gifts for purposes of
determining the deceased spousal unused exclusion amount
of last deceased spouse.
(a) General rule. Notwithstanding Sec. 20.2001-1(b), Sec. Sec.
20.2010-2(d) and 20.2010-3(d) provide 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 amount available under section 2010(c) of the
Internal Revenue Code.
(b) Effective/applicability date. Paragraph (a) of this section
applies to the estates of decedents dying on or after June 12, 2015. See
26 CFR 20.2001-2T(a), as contained in 26 CFR part 20, revised as of
April 1, 2015, for the rules applicable to estates of decedents dying on
or after January 1, 2011, and before June 12, 2015.
[T.D. 9725, 80 FR 34284, June 16, 2015]
[[Page 184]]
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. 20.2010-0 Table of contents.
This section lists the table of contents for Sec. Sec. 20.2010-1
through 20.2010-3.
Sec. 20.2010-1 Unified credit against estate tax; in general.
(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.
Sec. 20.2010-2 Portability provisions applicable to estate of a
decedent survived by a spouse.
(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) Requirement for DSUE computation on estate tax return.
(c) Computation of the DSUE amount.
(1) General rule.
(2) Special rule to consider gift taxes paid by decedent.
(3) Impact of applicable credits.
(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 185]]
Sec. 20.2010-3 Portability provisions applicable to the surviving
spouse's estate.
(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
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) Exception when surviving spouse not a U.S. citizen on date of
deceased spouse's death.
(3) 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.
[T.D. 9725, 80 FR 34285, June 16, 2015]
Sec. 20.2010-1 Unified credit against estate tax; in general.
(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. 20.2010-2 and 20.2010-3.
(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 the rules on computing the DSUE amount, see Sec. Sec.
20.2010-2(c) and 20.2010-3(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.
20.2010-3(a) and 25.2505-2(a) 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. This section applies to the
estates of decedents dying on or after June 12, 2015. See 26 CFR
20.2010-1T, as contained in 26 CFR part 20, revised as of April 1, 2015,
for the rules applicable to estates
[[Page 186]]
of decedents dying on or after January 1, 2011, and before June 12,
2015.
[T.D. 9725, 80 FR 34285, June 16, 2015]
Sec. 20.2010-2 Portability provisions applicable to estate
of a decedent survived by a spouse.
(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. 20.2010-3 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 nine 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. An extension of time to elect portability under this
paragraph (a) will not be granted under Sec. 301.9100-3 of this chapter
to an estate that is required to file an estate tax return under section
6018(a), as determined without regard to this paragraph (a). Such an
extension, however, may be available under the procedures applicable
under Sec. Sec. 301.9100-1 and 301.9100-3 of this chapter to an estate
that is not required to file a return under section 6018(a), as
determined without regard to this paragraph (a).
(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 is 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 or
may supersede a portability election previously made, provided that the
estate tax return reporting the election or the superseding 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 on or after January 1, 2011. 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
[[Page 187]]
the United States, within the meaning of section 2203 (an appointed
executor), may timely 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. 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 timely 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 when
there is no appointed executor for that decedent's estate can be
superseded by a subsequent contrary election made by an appointed
executor of that same decedent's estate on an estate tax return filed on
or before the due date of the return, including extensions actually
granted. An election to allow portability made by a non-appointed
executor cannot be superseded by a contrary election to have portability
not apply 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
in certain circumstances as provided in this paragraph (a) and as may be
further described in guidance issued from time to time by publication in
the Internal Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this
chapter). In particular, 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 a recipient other than
the recipient of the marital or charitable deduction property;
(2) The value of such property is needed to determine the estate's
eligibility for the provisions of sections 2032, 2032A, or another
estate or generation-skipping transfer tax provision of the Code for
which the value of such property or the value of the gross estate or
adjusted gross estate must be known (not including section 1014 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.
[[Page 188]]
(B) Return requirements when reporting of value not required for
certain property. 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. Using the executor's best estimate of the
value of properties to which paragraph (a)(7)(ii)(A) of this section
applies, the executor must report on the estate tax return, under
penalties of perjury, the amount corresponding to the particular range
within which falls the executor's best estimate of the total gross
estate, in accordance with the Instructions for Form 706.
(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 2015, survived by his wife (W), that both H and W
are U.S. citizens, that H's gross estate does not exceed the excess of
the applicable exclusion amount for the 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 reports 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 outright to 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 attaches a copy of
H's will 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 reports 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 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) Requirement for DSUE computation on estate tax return. Section
2010(c)(5)(A) requires an executor of a decedent's estate to 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. This requirement is satisfied
by the timely filing of a
[[Page 189]]
complete and properly prepared estate tax return, as long as the
executor has not elected out of portability as described in paragraph
(a)(3)(i) of this section. See paragraph (a)(7) of this section for the
requirements for a return to be considered complete and properly
prepared.
(c) Computation of the DSUE amount--(1) General rule. Subject to
paragraphs (c)(2) through (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) Impact of applicable credits. An estate's eligibility under
sections 2012 through 2015 for credits against the tax imposed by
section 2001 does not impact the computation of the DSUE amount.
(4) Special rule in case of property passing to qualified domestic
trust--(i) In general. 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 termination of
all QDOTs created by or funded with assets passing from the decedent or
the death of the surviving spouse) on which estate tax is imposed under
section 2056A. See Sec. 20.2056A-6 for the rules on determining the
estate tax under section 2056A. See Sec. 20.2010-3(c)(3) regarding the
timing of the availability of the decedent's DSUE amount to the
surviving spouse.
(ii) Surviving spouse becomes a U.S. citizen. If the surviving
spouse becomes a U.S. citizen and if the requirements of section
2056A(b)(12) and the corresponding regulations are satisfied, the estate
tax imposed under section 2056A(b)(1) ceases to apply. Accordingly, no
estate tax will be imposed under section 2056A either on subsequent QDOT
distributions or on the property remaining in the QDOT on the surviving
spouse's death and the decedent's DSUE amount is no longer subject to
adjustment.
(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 in
2015, survived by Wife (W). H and W are U.S. 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 $3,430,000 (the lesser of the $5,430,000 basic exclusion
amount in 2015, or the excess of H's $5,430,000 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 of this paragraph (c)(5) 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 2002 transfer.
(ii) Application. On H's death, the executor of H's estate computes
the DSUE amount to be $3,430,000 (the lesser of the $5,430,000 basic
exclusion amount in 2015, or the excess of H's
[[Page 190]]
$5,430,000 applicable exclusion amount over the sum of the $1,000,000
taxable estate and $1,000,000 of adjusted taxable gifts sheltered from
tax by H's applicable credit amount). 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 U.S. 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 2015 with a gross estate of $2,000,000. H's surviving spouse (W) is a
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 executor computes H's preliminary DSUE amount to be $3,930,000 (the
lesser of the $5,430,000 basic exclusion amount in 2015, or the excess
of H's $5,430,000 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. At all
times since H's death, W has been a U.S. resident. In 2017, 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 $2,130,000
(the lesser of the $5,430,000 basic exclusion amount in 2015, or the
excess of H's $5,430,000 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)).
Example 4. Computation of DSUE amount when surviving spouse with
QDOT becomes a U.S. citizen. (i) Facts. The facts are the same as in
Example 3 of this paragraph (c)(5) except that W becomes a U.S. citizen
in 2016 and dies in 2018. The U.S. Trustee of the QDOT notifies the IRS
that W has become a U.S. citizen by timely filing a final estate tax
return (Form 706-QDT). Pursuant to section 2056A(b)(12), the estate tax
under section 2056A no longer applies to the QDOT property.
(ii) Application. Because H's DSUE amount no longer is subject to
adjustment once W becomes a citizen of the United States, H's DSUE
amount is $3,930,000, as it was preliminarily determined as of H's
death. Upon W's death in 2018, the value of the QDOT property is
includible in W's gross estate.
(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. 20.2010-3(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 on or after June 12, 2015. See 26 CFR
20.2010-2T, as contained in 26 CFR part 20, revised as of April 1, 2015,
for the rule applicable to estates of decedents dying on or after
January 1, 2011, and before June 12, 2015.
[T.D. 9725, 80 FR 34285, June 16, 2015]
Sec. 20.2010-3 Portability provisions applicable
to the surviving spouse's estate.
(a) Surviving spouse's estate limited to DSUE amount of last
deceased spouse--(1) In general. The deceased spousal unused exclusion
(DSUE) amount of a decedent, computed under Sec. 20.2010-2(c), 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. 20.2010-1(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. 20.2010-2(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
[[Page 191]]
(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. 20.2010-1(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. 20.2010-1(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.
25.2505-2(b) and (c). If a surviving spouse has applied the DSUE amount
of one or more (successive) last deceased spouses to the surviving
spouse's transfers during life, and if any of those last deceased
spouses is different from the surviving spouse's last deceased spouse as
defined in Sec. 20.2010-1(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 U.S. citizens, illustrates the application of this
paragraph (b):
Example. (i) Facts. Husband 1 (H1) dies in 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. In 2012, 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. 25.2505-2(c), and, therefore,
W owes no gift tax. W has an applicable exclusion amount remaining in
the amount of $8,120,000 ($3,000,000 of H1's remaining DSUE amount plus
W's own $5,120,000 basic exclusion amount). W marries Husband 2 (H2) in
2013. H2 dies in 2014. 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 2015.
(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 2012 taxable gifts. The
$4,000,000 DSUE amount added to W's $5,430,000 basic exclusion amount
(for 2015), causes W's applicable exclusion amount to be $9,430,000.
(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. 20.2010-2(a) and (b) for applicable
requirements) generally applies as of the date of the decedent's death.
Thus, such 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 (subject to the limitations in
paragraph (a) of this section). 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. 20.2010-2(a)(4);
(ii) To the extent that the DSUE amount subsequently is reduced by a
[[Page 192]]
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) Exception when surviving spouse not a U.S. citizen on date of
deceased spouse's death. If a surviving spouse becomes a citizen of the
United States after the death of the surviving spouse's last deceased
spouse, the DSUE amount of the surviving spouse's last deceased spouse
becomes available to the surviving spouse on the date the surviving
spouse becomes a citizen of the United States (subject to the
limitations in paragraph (a) of this section). However, when the special
rule regarding qualified domestic trusts in paragraph (c)(3) of this
section applies, the earliest date on which a decedent's DSUE amount may
be included in the applicable exclusion amount of such decedent's
surviving spouse who becomes a U.S. citizen is as provided in paragraph
(c)(3) of this section.
(3) 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 the decedent's 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. 20.2010-2(c)(4) (subject to the
limitations in paragraph (a) of this section). The earliest date on
which such 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 termination of all QDOTs created by or funded with
assets passing from the decedent or the death of the surviving spouse)
on which tax under section 2056A is imposed. However, the decedent's
DSUE amount as redetermined in accordance with Sec. 20.2010-2(c)(4) may
be applied to certain taxable gifts of the surviving spouse. See Sec.
25.2505-2(d)(3)(i).
(ii) Surviving spouse becomes a U.S. citizen. If a surviving spouse
for whom property has passed from a decedent in one or more QDOTs
becomes a citizen of the United States and the requirements in section
2056A(b)(12) and the corresponding regulations are satisfied, then the
date on which such decedent's DSUE amount may be included in the
applicable exclusion amount of the surviving spouse under section
2010(c)(2) (subject the limitations in paragraph (a) of this section) is
the date on which the surviving spouse becomes a citizen of the United
States. See Sec. 20.2010-2(c)(4) for the rules for computing the
decedent's DSUE amount in the case of a qualified domestic trust.
(d) Authority to examine returns of deceased spouses. For the
purpose of determining the DSUE amount to be included in the applicable
exclusion amount of a 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 of a deceased spouse; 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
[[Page 193]]
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. 20.2010-1(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 on or after June 12, 2015. See 26 CFR
20.2010-3T, as contained in 26 CFR part 20, revised as of April 1, 2015,
for the rules applicable to estates of decedents dying on or after
January 1, 2011, and before June 12, 2015.
[T.D. 9725, 80 FR 34288, June 16, 2015]
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
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
[[Page 194]]
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 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,
[[Page 195]]
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 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
[[Page 196]]
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, 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:
[[Page 197]]
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 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,
[[Page 198]]
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.
(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
[[Page 199]]
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 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,
[[Page 200]]
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 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:
[[Page 201]]
(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.
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
[[Page 202]]
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 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))].......................
[[Page 203]]
(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. 20.2013-3(b)) = 117,391.30
$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)) x 100 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
============
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)):
[[Page 204]]
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 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
[[Page 205]]
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:
(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
[[Page 206]]
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 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
[[Page 207]]
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, 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.
[[Page 208]]
(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:
[($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)
[[Page 209]]
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 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
[[Page 210]]
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 /
$750,000 x $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 / $750,000 x $180,000).............................
(2) ``Second limitation'' computed under Sec. 20.2014-3 109,376
($400,000 / $1,000,000 x $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.
(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.
[[Page 211]]
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 /
$125,000 x $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 / $75,000 x $6,000)
---------
(c) Total ``first limitation''................................ 11,625
(d) ``Second limitation'' (computed under paragraph (d) of 11,437
Sec. 20.2014-3) ($75,000 / $250,000 x $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 / $125,000 x
$18,750).....................................................
(b) Federal estate tax attributable to property situated in 19,062
Country X and subjected to tax by both countries ($125,000 /
$250,000 x $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 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 / $125,000 x
$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
[[Page 212]]
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, 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
[[Page 213]]
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
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
[[Page 214]]
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. 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
[[Page 215]]
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 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]
[[Page 216]]
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.
(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
[[Page 217]]
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, 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
[[Page 218]]
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 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
[[Page 219]]
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 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
[[Page 220]]
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 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
[[Page 221]]
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;
(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]
[[Page 222]]
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, 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.
[[Page 223]]
(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).
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
[[Page 224]]
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.
(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
[[Page 225]]
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 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
[[Page 226]]
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 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
[[Page 227]]
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
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
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 228]]
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
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
[[Page 229]]
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
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
[[Page 230]]
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
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
[[Page 231]]
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
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
[[Page 232]]
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
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
[[Page 233]]
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 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.
[[Page 234]]
[GRAPHIC] [TIFF OMITTED] TR10AU11.039
[[Page 235]]
[GRAPHIC] [TIFF OMITTED] TR10AU11.040
[[Page 236]]
[GRAPHIC] [TIFF OMITTED] TR10AU11.041
[[Page 237]]
[GRAPHIC] [TIFF OMITTED] TR10AU11.042
[[Page 238]]
[GRAPHIC] [TIFF OMITTED] TR10AU11.043
[[Page 239]]
[GRAPHIC] [TIFF OMITTED] TR10AU11.044
[[Page 240]]
[GRAPHIC] [TIFF OMITTED] TR10AU11.045
[[Page 241]]
[GRAPHIC] [TIFF OMITTED] TR10AU11.046
[[Page 242]]
[GRAPHIC] [TIFF OMITTED] TR10AU11.047
[[Page 243]]
[GRAPHIC] [TIFF OMITTED] TR10AU11.048
[[Page 244]]
[GRAPHIC] [TIFF OMITTED] TR10AU11.049
[[Page 245]]
[GRAPHIC] [TIFF OMITTED] TR10AU11.050
[[Page 246]]
[GRAPHIC] [TIFF OMITTED] TR10AU11.051
[[Page 247]]
[GRAPHIC] [TIFF OMITTED] TR10AU11.052
[[Page 248]]
[GRAPHIC] [TIFF OMITTED] TR10AU11.053
[[Page 249]]
[GRAPHIC] [TIFF OMITTED] TR10AU11.054
[[Page 250]]
[GRAPHIC] [TIFF OMITTED] TR10AU11.055
[[Page 251]]
[GRAPHIC] [TIFF OMITTED] TR10AU11.056
[[Page 252]]
[GRAPHIC] [TIFF OMITTED] TR10AU11.057
[[Page 253]]
[GRAPHIC] [TIFF OMITTED] TR10AU11.058
[[Page 254]]
[GRAPHIC] [TIFF OMITTED] TR10AU11.059
[[Page 255]]
[GRAPHIC] [TIFF OMITTED] TR10AU11.060
[[Page 256]]
(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 257]]
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 258]]
(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 259]]
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 260]]
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 261]]
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 262]]
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 263]]
(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 264]]
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 265]]
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 266]]
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 267]]
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 268]]
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 269]]
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 270]]
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 271]]
(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 af-fect 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 272]]
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 273]]
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
[[Page 274]]
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 275]]
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 276]]
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:
------------------------------------------------------------------------
(2) Prior (1-2)
(1) 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
[[Page 277]]
(c)(2)(iii) of this section is illustrated in the following examples:
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
[[Page 278]]
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--
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 279]]
[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 280]]
(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 281]]
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 282]]
(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 283]]
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 284]]
(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 285]]
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 286]]
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 287]]
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 288]]
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 289]]
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-
[[Page 290]]
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 291]]
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 292]]
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 293]]
(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 / $40,000 x
$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 294]]
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 295]]
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 296]]
(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 297]]
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 298]]
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 299]]
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 (4 x $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 300]]
$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
[[Page 301]]
gift and the time of the acquisition of the jointly held property;
(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
[[Page 302]]
term ``power of appointment'' does not 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 303]]
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 304]]
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 305]]
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 306]]
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 307]]
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 308]]
(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 309]]
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 310]]
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 311]]
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 312]]
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 313]]
(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 314]]
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 315]]
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 316]]
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 317]]
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 318]]
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 319]]
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
($10,000 x 9.1030).
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 ($10,000 x 3.7808).
(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 ($10,000 x 9.1030 x 1.0244).
(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 320]]
(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 $50 x 12 x 8.4743 (see Table A) x 1.0450 (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 $50 x 12 x 9.0770
(see Table B) x 1.0534, 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 ($50,000 x 0.95254).
(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 ($50,000 x .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 321]]
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 322]]
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 323]]
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 324]]
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 325]]
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 326]]
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 327]]
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 328]]
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 329]]
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 330]]
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 331]]
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 332]]
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 333]]
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 334]]
(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 335]]
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 336]]
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 337]]
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 338]]
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 339]]
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 340]]
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 341]]
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 342]]
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 343]]
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 344]]
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 345]]
(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 346]]
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 347]]
(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
[[Page 348]]
within the time prescribed in section 6511(a).
(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
[[Page 349]]
must identify each outstanding claim 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 350]]
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 351]]
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 352]]
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 353]]
(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 354]]
(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
[[Page 355]]
IRS) 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).
(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
[[Page 356]]
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 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
[[Page 357]]
actuarial principles, using factors set forth 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 358]]
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 taxes x Joint
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 359]]
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 360]]
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 361]]
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 362]]
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 363]]
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 364]]
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 365]]
(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 366]]
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
[[Page 367]]
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
[[Page 368]]
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
[[Page 369]]
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
[[Page 370]]
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
[[Page 371]]
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 372]]
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 373]]
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 374]]
(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 375]]
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 ($4,100 x 4.9173), as determined under Table B in Sec.
20.2031-7A(d). The
[[Page 376]]
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 ([$5,000 x 4.2124] x 2), 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 ($5,000 x 6.7754), 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 ($5,000 x 7.3601), 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]
Editorial Note: For Federal Register citations affecting Sec.
20.2055-2, see the List of CFR Sections Affected, which appears in the
Finding Aids section of the printed volume and at www.govinfo.gov.
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,
[[Page 377]]
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 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
[[Page 378]]
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).
(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
[[Page 379]]
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 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
[[Page 380]]
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.
(1) In general.
(2) Burden of establishing requisite facts.
(c) Marital deduction; limitation on aggregate deductions.
(1) Estates of decedents dying before 1977.
[[Page 381]]
(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.
[[Page 382]]
(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.
(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
[[Page 383]]
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:
(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
[[Page 384]]
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 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
[[Page 385]]
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 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
[[Page 386]]
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:
(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
[[Page 387]]
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:
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
[[Page 388]]
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, 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
[[Page 389]]
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 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
[[Page 390]]
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 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
[[Page 391]]
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 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.
[[Page 392]]
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 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
[[Page 393]]
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 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.
[[Page 394]]
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--
(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.
[[Page 395]]
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. 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
[[Page 396]]
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 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
[[Page 397]]
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 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
[[Page 398]]
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 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
[[Page 399]]
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 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
[[Page 400]]
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 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
[[Page 401]]
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 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
[[Page 402]]
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 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
[[Page 403]]
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 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.
[[Page 404]]
(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 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
[[Page 405]]
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.
(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
[[Page 406]]
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 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).
[[Page 407]]
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 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
[[Page 408]]
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 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
[[Page 409]]
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 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--
[[Page 410]]
(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;
(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]
[[Page 411]]
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 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
[[Page 412]]
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 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,
[[Page 413]]
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 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.
[[Page 414]]
(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.
(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
[[Page 415]]
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.
(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
[[Page 416]]
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 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
[[Page 417]]
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 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
[[Page 418]]
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 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
[[Page 419]]
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 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
[[Page 420]]
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 [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]
[[Page 421]]
[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].
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
[[Page 422]]
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.
(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
[[Page 423]]
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 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
[[Page 424]]
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 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
[[Page 425]]
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--
(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
[[Page 426]]
(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, 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
[[Page 427]]
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 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
[[Page 428]]
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 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.
[[Page 429]]
(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 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.
[[Page 430]]
(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.
(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
[[Page 431]]
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 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;
[[Page 432]]
(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 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;
[[Page 433]]
(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 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
[[Page 434]]
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 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
[[Page 435]]
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 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.
[[Page 436]]
(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]
(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
[[Page 437]]
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 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
[[Page 438]]
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 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)
[[Page 439]]
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 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
[[Page 440]]
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:
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
[[Page 441]]
[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 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]
[[Page 442]]
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 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
[[Page 443]]
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 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
[[Page 444]]
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 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
[[Page 445]]
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]