[Federal Register Volume 63, Number 160 (Wednesday, August 19, 1998)]
[Rules and Regulations]
[Pages 44391-44393]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-22089]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 20 and 602

[TD 8779]
RIN 1545-AU27


Estate and Gift Tax Marital Deduction

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations amending the estate 
tax marital deduction regulations. The amendments are made to conform 
the estate tax regulations to recent court decisions in Estate of 
Clayton v. Commissioner, 976 F.2d 1486 (5th Cir. 1992), rev'g 97 T.C. 
327 (1991); Estate of Robertson v. Commissioner, 15 F.3d 779 (8th Cir. 
1994), rev'g 98 T.C. 678 (1992); Estate of Spencer v. Commissioner, 43 
F.3d 226 (6th Cir. 1995), rev'g T.C. Memo. 1992-579; and Estate of 
Clack v. Commissioner, 106 T.C. 131 (1996). The amendments affect 
estates of decedents electing the marital deduction for qualified 
terminable interest property (QTIP) and the estates of the surviving 
spouses of such decedents.

DATES: These regulations are effective August 19, 1998.

FOR FURTHER INFORMATION CONTACT: Susan B. Hurwitz, (202) 622-3090 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information in these final regulations has been 
reviewed and, pending receipt and evaluation of public comments, 
approved by the Office of Management and Budget (OMB) under 44 U.S.C. 
3507 and assigned control number 1545-1612.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number assigned by OMB.

[[Page 44392]]

    The collection of information in this regulation is in 
Sec. 20.2056(b)-7(d)(3)(ii). This information is required to provide a 
method for estates of decedents whose estate tax returns were due on or 
before February 18, 1997, to obtain an extension of time to make the 
qualified terminable interest property election under section 
2056(b)(7)(B)(v). This information will be used to inform the IRS of 
the affected estates that are electing to obtain the relief granted in 
the regulation. The collection of information is mandatory for those 
estates that seek relief. The likely respondents are individuals 
representing estates.
    Comments concerning the collection of information should be 
directed to OMB, Attention: Desk Officer for the Department of the 
Treasury, Office of Information and Regulatory Affairs, Washington, DC 
20503, with copies to the Internal Revenue Service, Attention: IRS 
Reports Clearance Officer, OP:FS:FP, Washington, DC 20224. Any such 
comments should be submitted not later than October 19, 1998. Comments 
are specifically requested concerning:
    Whether the collection of information is necessary for the proper 
performance of the functions of the IRS, including whether the 
information will have practical utility.
    The accuracy of the estimated burden associated with the collection 
of information (see below);
    How to enhance the quality, utility, and clarity of the information 
collected;
    How to minimize the burden of complying with the collection of 
information, including the application of automated collection 
techniques or other forms of information technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    Estimates of the reporting burden in these final regulations will 
be reflected in the burden of Form 843 (Claim for Refund and Request 
for Abatement) and Form 706 (Estate Tax Return) or 706NA (Estate Tax 
Return for Nonresident Noncitizens).
    Books or records relating to this collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    On March 1, 1994, the IRS published final estate and gift tax 
regulations (26 CFR part 20 and part 25) under sections 2044, 2056, 
2207A, 2519, 2523, and 6019 of the Internal Revenue Code (Code) in the 
Federal Register (59 FR 9642). At that time, Sec. 20.2056(b)-7(d)(3) 
provided that an income interest (or life estate) that is contingent 
upon the executor's election under section 2056(b)(7)(B)(v) (the QTIP 
election) is not a qualifying income interest for life.
    On February 18, 1997, temporary regulations (TD 8714) amending the 
existing final estate tax regulations relating to the marital deduction 
for qualified terminable interest property (QTIP) were published in the 
Federal Register (62 FR 7156). A notice of proposed rulemaking (REG-
209830-96) cross-referencing the temporary regulations was published in 
the Federal Register (62 FR 7188) for the same day.
    The temporary regulations provide that an income interest for life 
(or life estate) that is contingent upon the executor's QTIP election, 
will not, because of the contingency, fail to be a qualifying income 
interest for life.
    Written comments responding to the notice of proposed rulemaking 
were received. A public hearing was held on June 3, 1997. After 
consideration of all the comments, the proposed regulations under 
sections 2044 and 2056 are adopted as revised by this Treasury 
decision, and the corresponding temporary regulations are removed.

Explanation of Revisions and Summary of Comments

    Under section 2056(b)(7)(B)(ii), the surviving spouse has a 
qualifying income interest for life in property which passes from the 
decedent if (1) the surviving spouse is entitled to all of the income 
from the property, payable at least annually (or has a usufruct 
interest for life in the property), and (2) no person has a power to 
appoint any part of the property to any person other than the surviving 
spouse.
    Commentators suggested that the regulation, based on the case law, 
should specifically provide that as a result of the executor's election 
over a portion of the property, in cases where the unelected portion of 
the property passes to a beneficiary other than the surviving spouse, 
the executor will not be considered to have a power to appoint any part 
of the property to any person other than the surviving spouse.
    The final regulation is clarified to provide that an interest in 
property is eligible for treatment as qualified terminable interest 
property if the income interest is contingent upon the executor's 
election and if that portion of the property for which no election is 
made will pass to or for the benefit of beneficiaries other than the 
surviving spouse. Two examples provided in the temporary regulations 
have been revised in the final regulations to conform to this 
clarification.
    Comments were also received regarding the effective date of the 
temporary regulations. It was suggested that relief should be made 
available for estates of decedents that did not make the QTIP election 
on their estate tax returns 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. Accordingly, the final regulations 
provide that estates of decedents whose estate tax returns were due on 
or before February 18, 1997, are granted an extension of time to make 
the QTIP election if: (1) the period of limitations on filing a claim 
for credit or refund under section 6511(a) has not expired; and (2) the 
estate submits a statement providing that, pursuant to section 2044, 
the surviving spouse's gross estate will include the value, at the date 
of the surviving spouse's death, of the property for which the QTIP 
election is being made. 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).

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in EO 12866. Therefore, a 
regulatory assessment is not required. It has also been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
does not apply to these regulations and, because these regulations do 
not impose on small entities a collection of information requirement, 
the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. 
Therefore, a Regulatory Flexibility Analysis is not required. Pursuant 
to section 7805(f) of the Code, the notice of proposed rulemaking 
preceding these regulations was submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on their 
impact on small business.
    Drafting Information. The principal author of these regulations is 
Susan B. Hurwitz, Office of Assistant Chief Counsel (Passthroughs and 
Special Industries). However, other personnel from the IRS

[[Page 44393]]

and the Treasury Department participated in their development.

List of Subjects

26 CFR Part 20

    Estate taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 20 and 602 are amended as follows:

PART 20--ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16, 
1954

    Paragraph 1. The authority citation for part 20 continues to read 
in part as follows:

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

    Par. 2. In Sec. 20.2044-1, paragraph (e), Example 8 is added to 
read as follows:


Sec. 20.2044-1  Certain property for which marital deduction was 
previously allowed.

* * * * *
    (e) * * *

    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.


Sec. 20.2044-1T  [Removed]

    Par. 3. Section 20.2044-1T is removed.
    Par. 4. In Sec. 20.2056(b)-(7), paragraphs (d)(3) and (h) Example 6 
are revised to read as follows:


Sec. 20.2056(b)-(7)  Election with respect to life estate for surviving 
spouse.

* * * * *
    (d) * * *
    (3) Contingent income interests. (i) An income interest for a term 
of years, or a life estate subject to termination upon the occurrence 
of a specified event (e.g., remarriage), is not a qualifying income 
interest for life. However, a qualifying income interest for life that 
is contingent upon the executor's election under section 
2056(b)(7)(B)(v) will not fail to be a qualifying income interest for 
life because of such contingency or because the portion of the property 
for which the election is not made passes to or for the benefit of 
persons other than the surviving spouse. This paragraph (d)(3)(i) 
applies with respect to estates of decedents whose estate tax returns 
are due after February 18, 1997. This paragraph (d)(3)(i) also applies 
to estates of decedents whose estate tax returns were due on or before 
February 18, 1997, that meet the requirements of paragraph (d)(3)(ii) 
of this section.
    (ii) Estates of decedents whose estate tax returns were due on or 
before February 18, 1997, that did not make the election under section 
2056(b)(7)(B)(v) because the surviving spouse's income interest in the 
property was contingent upon the election or because the nonelected 
portion of the property was to pass to a beneficiary other than the 
surviving spouse are granted an extension of time to make the QTIP 
election 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).
* * * * *
    (h) * * *

    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.
* * * * *


Sec. 20.2056(b)-7T  [Removed]

    Par. 5. Section 20.2056(b)-7T is removed.
    Par. 6. Section 20.2056(b)-10 is revised to read as follows:


Sec. 20.2056(b)-10  Effective dates.

    Except as specifically provided in Secs. 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 Secs. 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.


Sec. 20.2056(b)-10T  [Removed]

    Par. 7. Section 20.2056(b)-10T is removed.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 8. In Sec. 602.101, paragraph (c), the entry in the table for 
20.2056(b)-7 is revised to read as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (c) * * *

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                                                             Current OMB
     CFR part or section where identified and described      control No.
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                  *        *        *        *        *                 
20.2056(b)-7...............................................    1545-0015
                                                               1545-1612
                                                                        
                  *        *        *        *        *                 
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Michael P. Dolan,
Deputy Commissioner of Internal Revenue.

    Approved: July 27, 1998.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 98-22089 Filed 8-18-98; 8:45 am]
BILLING CODE 4830-01-U