[Federal Register Volume 67, Number 140 (Monday, July 22, 2002)]
[Proposed Rules]
[Pages 47755-47757]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-18184]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 25

[REG-123345-01]
RIN 1545-AY91


Net Gift Treatment Under Section 2519

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed amendments to the regulations 
relating to the amount treated as a transfer under section 2519 of the 
Internal Revenue Code when there is a right to recover gift tax under 
section 2207A(b) and the related gift tax consequences if the right to 
recover the gift tax is not exercised. The proposed regulations will 
affect donee spouses who make lifetime dispositions of all or part of a 
qualifying income interest in qualified terminable interest property. 
This document also provides notice of a public hearing on these 
proposed regulations.

DATES: Written comments and outlines of topics to be discussed at the 
public hearing scheduled for Tuesday, October 15, 2002, at 10 a.m., 
must be received by Tuesday, September 24, 2002.

ADDRESSES: Send submissions to: CC:ITA:RU (REG-123345-01), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Submissions may also be hand delivered Monday through Friday 
between the hours of 8 a.m. and 5 p.m. to: CC:ITA:RU (REG-123345-01), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW., 
Washington, DC. Alternatively, taxpayers may submit comments 
electronically directly to the IRS internet site at www.irs.gov/regs. 
The public hearing will be held in room 4718, Internal Revenue 
Building, 1111 Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, DeAnn K. 
Malone, (202) 622-7830; concerning submissions of comments, the 
hearing,

[[Page 47756]]

and/or to be placed on the building access list to attend the hearing, 
Guy Traynor, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    A marital deduction for qualified terminable interest property is 
allowed for estate tax purposes under section 2056(b)(7) and for gift 
tax purposes under section 2523(f). Qualified terminable interest 
property is property transferred by the decedent or donor spouse, in 
which the donee spouse has a qualifying income interest for life, and 
for which an election has been made. If the donee spouse makes a 
lifetime disposition of all or a portion of the qualifying income 
interest, section 2519 provides that the donee spouse is treated for 
estate and gift tax purposes as transferring all interests in the 
property other than the qualifying income interest. Under section 
2207A(b), the donee spouse is entitled to recover any gift tax paid 
with respect to a transfer under section 2519 from the person receiving 
the transferred property.
    Proposed regulations under several sections including sections 2519 
and 2207A(b) were issued on May 21, 1984 (49 FR 21350 [LR-211-76, 1984-
1 C.B. 598]). The proposed regulations provided that the amount of the 
gift under section 2519 is reduced by the amount of the gift tax that 
the donee spouse is entitled to recover under section 2207A(b) and that 
the donee spouse makes an additional gift if the donee spouse fails to 
exercise the right to recover the gift tax. These two provisions were 
not included in the regulations when they were finalized (TD 8522, 
1994-1 C.B. 236). The preamble to the final regulations stated that 
these issues would be the subject of future proposed regulations. 
Sections 25.2519-1(c)(4) and 25.2207A-1(b) were reserved for those 
provisions.

Explanation of Provisions

    Section 2207A(b) statutorily shifts the burden for paying the gift 
tax imposed on a transfer under section 2519 from the donee spouse to 
the person receiving the transferred property. The payment of gift tax 
by the person receiving the property benefits the donee spouse because 
the donee spouse is liable for the payment of this tax and, absent the 
right of recovery, would be required to pay the tax from the donee 
spouse's own assets.
    The proposed regulations will amend the regulations under section 
2519 to provide that the amount of the transfer under section 2519 is 
reduced by the amount of the gift tax that the donee spouse is entitled 
to recover under section 2207A(b). The amount of gift tax recoverable 
and the amount of the remainder interest treated as transferred under 
section 2519 are determined by using the interrelated computation 
applicable to other transfers in which the transferee agrees to pay the 
gift tax. See Rev. Rul. 81-23 (1981-2 C.B. 189).
    In addition, the proposed regulations will amend the regulations 
under section 2207A(b) to provide that if the donee spouse fails to 
exercise the right to recover the gift tax, the donee spouse makes a 
gift in the amount of the unrecovered gift tax to the person from whom 
the recovery of gift tax could have been obtained.

Proposed Effective Date

    The regulations will apply to any transfer under section 2519 where 
there is a right to recover gift tax under section 2207A(b) that occurs 
on or after the date final regulations are published in the Federal 
Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and because 
these regulations do not impose a collection of information on small 
entities, 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 Internal Revenue Code, the 
regulations will be submitted to the Small Business Administration for 
comment on their impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) that are submitted timely to the IRS. The IRS and 
Treasury Department request comments on the clarity of the proposed 
rule and how it may be made easier to understand. All comments will be 
available for public inspection and copying.
    A public hearing has been scheduled for Tuesday, October 15, 2002, 
at 10 a.m., in room 4718, Internal Revenue Building, 1111 Constitution 
Avenue NW., Washington, DC. Due to building security procedures, 
visitors must use the main building entrance on Constitution Avenue, 
NW. In addition, all visitors must present photo identification to 
enter the building. Because of access restrictions, visitors will not 
be admitted beyond the immediate entrance area more than 30 minutes 
before the hearing starts. For information about having your name 
placed on the building access list to attend the hearing, see the FOR 
FURTHER INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit comments and 
an outline of the topics to be discussed and the time to be devoted to 
each topic (signed original and eight (8) copies) by Tuesday, September 
24, 2002. A period of 10 minutes will be allotted to each person for 
making comments. An agenda showing the scheduling of the speakers will 
be prepared after the deadline for receiving outlines has passed. 
Copies of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these proposed regulations is DeAnn K. 
Malone, Office of the Chief Counsel, IRS. Other personnel from the IRS 
and Treasury Department participated in their development.

List of Subjects in 26 CFR Part 25

    Gift taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 25 is proposed to be amended as follows:

PART 25--GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954

    Paragraph 1. The authority citation for part 25 continues to read 
in part as follows:

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

    Par. 2. Section 25.2207A-1 is amended by adding the text of 
paragraph (b) to read as follows:


Sec. 25.2207A-1  Right of recovery of gift taxes in the case of certain 
marital deduction property.

* * * * *
    (b) Failure of a person to exercise the right of recovery. The 
failure of a person to exercise a right of recovery provided by section 
2207A(b) upon a lifetime transfer subject to section 2519 is treated as 
a transfer for Federal gift tax purposes of the unrecovered amounts to 
the person(s) from whom the recovery

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could have been obtained. See Sec. 25.2511-1. The transfer is 
considered to be made when the right to recovery is no longer 
enforceable and is treated as a gift even if recovery is impossible. 
Any delay in the exercise of the right of recovery shall be treated as 
an interest-free loan with the appropriate gift tax consequences.
* * * * *
    Par. 3. Section 25.2519-1 is amended as follows:
    1. Paragraph (c)(1) is amended by adding a sentence to the end of 
the paragraph.
    2. The paragraph heading for paragraph (c)(4) is revised and the 
text of paragraph (c)(4) is added.
    3. Paragraph (g) introductory text is revised.
    The additions and revisions read as follows:


Sec. 25.2519-1  Disposition of certain life estates.

* * * * *
    (c) * * * (1) * * * See paragraph (c)(4) of this section for the 
effect of gift tax that the donee spouse is entitled to recover under 
section 2207A.
* * * * *
    (4) Effect of gift tax entitled to be recovered under section 2207A 
on the amount of the transfer. The amount treated as a transfer under 
paragraph (c)(1) of this section is further reduced by the amount the 
donee spouse is entitled to recover under section 2207A(b) (relating to 
the right to recover gift tax attributable to the remainder interest). 
If the spouse is entitled to recover gift tax under section 2207A(b), 
the amount of gift tax recoverable and the value of the remainder 
interest treated as transferred under section 2519 are determined by 
using the same interrelated computation applicable for other transfers 
in which the transferee assumes the gift tax liability. The gift tax 
consequences of failing to exercise the right of recovery are 
determined separately under Sec. 25.2207A-1(b).
* * * * *
    (g) Examples. The following examples illustrate the application of 
paragraphs (a) through (f) of this section. Except as provided 
otherwise in the examples, assume that the decedent, D, was survived by 
spouse, S, that in each example the section 2503(b) exclusion has 
already been fully utilized for each year with respect to the donee in 
question, that section 2503(e) is not applicable to the amount deemed 
transferred, and that the gift taxes on the amount treated as 
transferred under paragraph (c) are offset by S's unified credit. The 
examples are as follows:
* * * * *

Robert E. Wenzel,
Deputy Commissioner of the Internal Revenue Service.
[FR Doc. 02-18184 Filed 7-19-02; 8:45 am]
BILLING CODE 4830-01-P