[Federal Register Volume 68, Number 138 (Friday, July 18, 2003)]
[Rules and Regulations]
[Pages 42593-42595]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-18018]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 20 and 25

[TD 9077]
RIN 1545-AY91


Net Gift Treatment Under Section 2519

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating both 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 to the related gift and estate tax consequences if the right to 
recover the gift tax is not exercised. The final regulations will 
affect donee spouses who make lifetime dispositions of all or part of a 
qualifying income interest in qualified terminable interest property.

EFFECTIVE DATE: These regulations are effective July 18, 2003.

[[Page 42594]]


FOR FURTHER INFORMATION CONTACT: DeAnn K. Malone, (202) 622-7830 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    On July 22, 2002, the IRS and the Treasury Department published in 
the Federal Register (67 FR 47755) a notice of proposed rulemaking 
(REG-123345-01) 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. 
Written comments responding to the notice were received. No public 
hearing was requested or held. This document adopts final regulations 
with respect to the notice of proposed rulemaking. The principal 
comments received and revisions in response to those comments are 
discussed below.

Explanation of Provisions

    Under the proposed regulations, any delay in the exercise of the 
right of recovery was treated as an interest-free loan with the 
resulting Federal tax consequences. One commentator suggested that the 
regulations be revised to provide a thirty-day safe harbor to ease the 
administrative burden to taxpayers and to avoid complex loan 
calculations. Accordingly, the commentator suggested that section 7872 
would not apply if the transferor received reimbursement of the amount 
of gift tax within thirty days after paying the tax.
    Whether a transaction involves a below-market loan subject to 
section 7872 depends on all the facts and circumstances of the 
particular case. Section 1.7872-5T(b)(14) of the Temporary Income Tax 
Regulations exempts from the application of section 7872 loans the 
interest arrangements of which the taxpayer is able to show have no 
significant effect on any Federal tax liability of the lender or the 
borrower, as described in Sec.  1.7872-5T(c)(3). Section 1.7872-
5T(c)(3) provides that whether a loan is without significant effect is 
determined according to all of the facts and circumstances. Among the 
factors to be considered are: (1) Whether items of income and deduction 
generated by the loan offset each other; (2) the amount of such items; 
(3) the cost to the taxpayer of complying with the provisions of 
section 7872 if the section were applied; and (4) any non-tax reasons 
for deciding to structure the transaction as a below-market loan rather 
than a loan with interest at a rate equal to or greater than the 
applicable Federal rate and a payment by the lender to the borrower. 
The Treasury Department and the IRS believe that, in most cases, a 
reasonable delay in the exercise of the right of recovery will result 
in a loan without significant tax effect under the facts and 
circumstances test in Sec.  1.7872-5T(c)(3). Accordingly, these final 
regulations do not create an additional safe harbor for a payment 
received within thirty days of payment of the tax.
    The final regulations have been revised to more completely describe 
the interrelation of section 2207A and section 7872. Specifically, the 
final regulations provide that a delay in the exercise of the right of 
recovery (that is, the request for and receipt of the amount of the 
tax) will be treated as a below-market loan if the loan does not 
provide for the payment of sufficient interest. Depending on the facts 
and circumstances as described in Sec.  1.7872-5T(c)(3), a loan arising 
from the delay may be a loan exempt from the application of section 
7872 because it is a loan the interest arrangements of which do not 
have a significant effect on any Federal tax liability of the lender or 
the borrower. The estate tax regulations under section 2207A are 
revised to be consistent with the gift tax regulations.
    In response to a comment, the final regulations clarify that the 
enforceability of the right of recovery is determined under applicable 
law.
    Commentators requested simplification of the method of determining 
when a right to recovery is no longer enforceable. One commentator 
suggested adopting a three-year period for determining whether or not 
the right of recovery is enforceable, and thus whether the gift is 
complete for gift tax purposes if the right of recovery is not 
exercised. The final regulations instead provide that the transferor 
may waive the right of recovery thus causing the gift from the 
transferor to the donee to be complete upon the later of the date of 
the waiver or the date of the payment of the Federal gift tax. The 
Treasury Department and the IRS believe that the waiver allows for the 
certainty requested by the commentators, and is more efficient for a 
taxpayer who will not exercise the right of recovery because the gift 
of the unrecovered tax can be completed simultaneously with the 
lifetime disposition of the qualifying income interest.

Special Analyses

    It has been determined that these final regulations are 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 proposed 
regulations preceding this final rule were submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on their impact on small business.

Drafting Information

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

List of Subjects

26 CFR Part 20

    Estate taxes, Reporting and recordkeeping requirements.

26 CFR Part 25

    Gift taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 20 and 25 are amended as follows:

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

0
Paragraph 1. The authority citation for part 20 continues to read in 
part as follows:


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


0
Par. 2. Section 20.2207A-1 is amended by removing the last two 
sentences of paragraph (a)(2) and adding three new sentences in their 
place to read as follows:


Sec.  20.2207A-1  Right of recovery of estate taxes in the case of 
certain marital deduction property.

    (a) * * *
    (2) * * * The transfer is considered made when the right of 
recovery is no longer enforceable under applicable law. A delay in the 
exercise of the right of recovery without payment of sufficient 
interest is a below-market loan. Section 1.7872-5T of the Temporary 
Income Tax regulations describes factors that are used to determine, 
based on the facts and circumstances of a particular case, whether a 
loan otherwise subject to

[[Page 42595]]

imputation under section 7872 (relating to the treatment of below-
market loans) is exempted from its provisions.
* * * * *

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

0
Par. 3. The authority citation for part 25 continues to read in part as 
follows:

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


0
Par. 4. 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. (1) The 
failure of a person to exercise a right of recovery provided by section 
2207A(b) upon a lifetime transfer subject to section 2519 is treated as 
a transfer for Federal gift tax purposes of the unrecovered amounts to 
the person(s) from whom the recovery could have been obtained. See 
Sec.  25.2511-1. The transfer is considered to be made when the right 
to recovery is no longer enforceable under applicable law and is 
treated as a gift even if recovery is impossible. A delay in the 
exercise of the right of recovery without payment of sufficient 
interest is a below-market loan. Section 1.7872-5T of this chapter 
describes factors that are used to determine, based on the facts and 
circumstances of a particular case, whether a loan otherwise subject to 
imputation under section 7872 (relating to the treatment of below-
market loans) is exempted from its provisions.
    (2) The transferor subject to section 2519 may execute a written 
waiver of the right of recovery arising under section 2207A before that 
right of recovery becomes unenforceable. If a waiver is executed, the 
transfer of the unrecovered amounts by the transferor is considered to 
be made on the later of--
    (i) The date of the valid and irrevocable waiver rendering the 
right of recovery no longer enforceable; or
    (ii) The date of the payment of the tax by the transferor.
* * * * *

0
Par. 5. Section 25.2519-1 is amended as follows:
0
1. Paragraph (c)(1) is amended by adding a sentence to the end of the 
paragraph.
0
2. The paragraph heading for paragraph (c)(4) is revised and the text 
of paragraph (c)(4) is added.
0
3. Paragraph (g) introductory text is revised.
    The additions and revisions read as follows:


Sec.  25.2519-1  Dispositions 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 donee spouse is entitled to recover gift tax under section 
2207A(b), the amount of gift tax recoverable and the value of the 
remainder interest treated as transferred under section 2519 are 
determined by using the same interrelated computation applicable for 
other transfers in which the transferee assumes the gift tax liability. 
The gift tax consequences of failing to exercise the right of recovery 
are determined separately under Sec.  25.2207A-1(b).
* * * * *
    (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 for Services and Enforcement.
    Approved: July 9, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 03-18018 Filed 7-17-03; 8:45 am]
BILLING CODE 4830-01-P