[Federal Register Volume 73, Number 81 (Friday, April 25, 2008)]
[Proposed Rules]
[Pages 22300-22303]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-9025]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 20

[REG-112196-07]
RIN 1545-BH64


Gross Estate; Election to Value on Alternate Valuation Date

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that provide 
guidance relating to the availability of the election to use the 
alternate valuation method under section 2032 of

[[Page 22301]]

the Internal Revenue Code (Code). The proposed regulations will affect 
estates that file Form 706, United States Estate (and Generation-
Skipping Transfer) Tax Return, and elect to use the alternate valuation 
method.

DATES: Written or electronic comments and requests for a public hearing 
must be received by July 24, 2008.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-112196-07), Internal 
Revenue Service, Room 5203, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
112196-07), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC 20224; or sent electronically via the 
Federal eRulemaking Portal at http://www.regulations.gov (IRS-REG-
112196-07).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Theresa M. Melchiorre, at (202) 622-3090; concerning submissions of 
comments or to request a hearing, Kelly Banks, at (202) 622-7180 (not 
toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains proposed amendments to the Estate Tax 
Regulations (26 CFR part 20) under section 2032 of the Code. Section 
2001 imposes a tax on the transfer of the taxable estate of every 
decedent who is a citizen or resident of the United States. Section 
2031(a) provides that the value of the decedent's gross estate includes 
the value at the time of decedent's death of all property, real or 
personal, tangible or intangible, wherever situated. Section 2032(a) 
provides that the value of the gross estate instead may be determined, 
if the executor so elects, by valuing all the property included in the 
gross estate as follows. Property distributed, sold, exchanged, or 
otherwise disposed of within 6 months after the decedent's death must 
be valued as of the date of distribution, sale, exchange, or other 
disposition. I.R.C. section 2032(a)(1). Property not distributed, sold, 
exchanged, or otherwise disposed of within 6 months after the 
decedent's death must be valued as of the date that is 6 months after 
the decedent's death. I.R.C. section 2032(a)(2). Any interest or estate 
which is affected by the mere lapse of time is included at its value as 
of the time of death (instead of the later date), with adjustment for 
any difference in its value as of the later date that is not due to the 
mere lapse of time. I.R.C. section 2032(a)(3).
    The predecessor to section 2032 is section 302(j) of the Revenue 
Act of 1926, as added by section 202(a) of the Revenue Act of 1935. 
Revenue Act of 1935, 74 Public Law 407, 49 Stat. 1014 (1935). Section 
302(j) allowed executors to elect to use a date that was one year after 
the date of decedent's death to value estate property. Section 302(j) 
contained provisions for valuing the property on the date of its sale 
or disposition during the alternate valuation period and for not taking 
into account changes in value due to a mere lapse of time. Congress 
enacted section 302(j) in response to ``the hardships which were 
experienced after 1929 when market values decreased very materially 
between the period from the date of death and the date of distribution 
to the beneficiaries.'' 79 Cong. Rec. 14632 (1935) (statement of Mr. 
Samuel B. Hill). See, also, H.R. Rep. No. 74-1681, at 9 (1935); S. Rep. 
No. 74-1240, part 1, at 9-10 (1935); and S. Rep. No. 74-1240, part 2, 
at 8-9 (1935). Section 302(j) was codified as section 811(j) in the 
Internal Revenue Code of 1939.
    In 1941, the U.S. Supreme Court addressed whether rents, dividends, 
and interest received and accrued during the alternate valuation period 
are includible in the decedent's gross estate under section 811(j). 
Maass v. Higgins, 312 U.S. 443 (1941). In that case, the Court stated 
that the purpose of section 811(j) is ``to mitigate the hardship 
consequent upon shrinkage in the value of estates during the year 
following death. Congress enacted it in the light of the fact that, due 
to such shrinkages, many estates were almost obliterated by the 
necessity of paying a tax on the value of the assets at the date of 
decedent's death.'' Id. at 446.
    In 1954, section 811(j) was recodified as section 2032. Congress 
considered proposals to amend section 811(j) and, again, Congress 
stated that, ``The option to value property [on the alternate valuation 
date] initially was provided during the Depression of the early 1930s 
because by the time estate taxes were paid, property values had dropped 
substantially, sometimes to such an extent that the proceeds of the 
sale would not pay the estate tax due.'' H. Rep. No. 83-1337 at 90 
(1954). See, also, S. Rep. No. 83-1622, at 122-123 (1954).
    In 1958, Sec.  20.2032-1 of the Estate Tax Regulations was 
published. This regulation restates the rule in section 2032(a)(3) and 
provides an example that illustrates the rule that only changes in the 
value of the decedent's gross estate due to market conditions, and not 
changes to the value due to a mere lapse of time, are to be considered 
in valuing the decedent's gross estate under the alternate valuation 
method. See example in Sec.  20.2032-1(f)(1).
    Two judicial decisions have interpreted the language of section 
2032 and its legislative history differently in determining whether 
post-death events other than market conditions may be taken into 
account under the alternate valuation method. In Flanders v. United 
States, 347 F. Supp. 95 (N.D. Cal. 1972), the district court held that 
the reduction in value of property included in the decedent's estate as 
a result of a voluntary act by the trustee, instead of as a result of 
market conditions, could not be taken into consideration in valuing the 
property under the alternate valuation method. In that case, a few 
months after the death of the decedent, the trustee of the trust owning 
decedent's undivided one-half interest in real property entered into a 
Land Conservation Agreement pursuant to the California Land 
Conservation Act of 1965. In exchange for restricting the property to 
agricultural uses for a period of 10 years, the trustee was allowed to 
reduce the assessed value of the land for purposes of paying property 
taxes. The estate elected to use the alternate valuation method for 
estate tax purposes and reported the value of the decedent's interest 
in the land as $25,000. This value represented one-half of the value of 
the ranch after the land use restriction was placed upon it, less a 
lack of marketability discount.
    The district court stated that, ``It seems clear that Congress 
intended that the character of the property be established for 
valuation purposes at the date of death. The option to select the 
alternate valuation date is merely to allow an estate to pay a lesser 
tax if unfavorable market conditions (as distinguished from voluntary 
acts changing the character of the property) result in a lessening of 
its fair market value.'' Id. at 98.
    In Kohler v. Commissioner, T.C. Memo. 2006-152, the U.S. Tax Court 
held that valuation discounts attributable to restrictions imposed on 
closely-held corporate stock pursuant to a post-death reorganization of 
the Kohler Company should be taken into consideration in valuing stock 
on the alternate valuation date. In that case, approximately two months 
after the death of the decedent, the Kohler Company underwent a 
reorganization that qualified as a tax-free reorganization under 
section 368(a) and, thus, was not a sale or disposition for purposes of 
section 2032(a)(1). The estate opted to receive new Kohler

[[Page 22302]]

shares that were subject to transfer restrictions. The estate elected 
to use the alternate valuation method under section 2032(a)(2) and took 
into account discounts attributable to the transfer restrictions on the 
stock in determining the value for Federal estate tax purposes. In the 
Internal Revenue Bulletin No. 2008-9 on March 3, 2008, the IRS 
nonacquiesced to the Tax Court opinion in Kohler (AOD 2008-1).

Explanation of Provisions

    The proposed regulations will amend Sec.  20.2032-1 by 
restructuring paragraph (f) of this section to clarify that the 
election to use the alternate valuation method under section 2032 is 
available to estates that experience a reduction in the value of the 
gross estate following the date of the decedent's death due to market 
conditions, but not due to other post-death events. The term market 
conditions is defined in the proposed regulations and examples are 
provided, which are not intended to be exclusive.

Proposed Effective Date

    The fourth sentence of Sec.  20.2032-1(f)(2)(i) is applicable to 
decedents dying after May 1, 1999, subject to transition rules for 
certain incapacitated individuals. The fifth sentence of Sec.  20.2032-
1(f)(2)(i) is applicable to decedents dying after November 30, 1983, 
subject to transition rules for certain incapacitated individuals. The 
first, second, and third sentences of Sec.  20.2032-1(f)(2)(i), Sec.  
20.2032-1(f)(2)(ii), and all but the last sentence in Sec.  20.2032-
1(f)(2) are applicable to decedent's dying after August 16, 1954. When 
adopted as final regulations, the rules contained in Sec.  20.2032-
1(f)(1), Sec.  20.2032-1(f)(3), and the last sentence of Sec.  20.2032-
1(f)(2), will be made applicable to estates of decedents dying on or 
after April 25, 2008.

Special Analyses

    It has been determined that this proposed regulation 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 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 Internal Revenue 
Code, this regulation has been submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and the Treasury Department also request comments on the 
clarity of the proposed regulations and how they may be made easier to 
understand. All comments will be available for public inspection and 
copying. A public hearing may be scheduled if requested in writing by 
any person that timely submits written comments. If a public hearing is 
scheduled, notice of the date, time, and place for the hearing will be 
published in the Federal Register.

Drafting Information

    The principal author of these proposed regulations is Theresa M. 
Melchiorre, Office of Associate Chief Counsel (Passthroughs and Special 
Industries).

List of Subjects in 26 CFR Part 20

    Estate taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 20 is proposed to be 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. Section 20.2032-1 is amended as follows:
    1. Paragraph (f)(1) is redesignated as paragraph (f)(2)(i).
    2. Paragraph (f)(2) is redesignated as paragraph (f)(2)(ii).
    3. Paragraph (f) introductory text is redesignated as paragraph 
(f)(2) introductory text and the last sentence is revised.
    4. New paragraphs (f)(1) and (f)(3) are added.
    5. The heading for paragraph (h) is revised and four sentences are 
added at the end of the paragraph.
    The additions and revisions read as follows.


Sec.  20.2032-1  Alternate valuation.

* * * * *
    (f) Post-death market conditions and other post-death events--(1) 
In general. The election to use the alternate valuation method under 
section 2032 permits the property included in the gross estate to be 
valued as of the alternate valuation date to the extent that the change 
in value during the alternate valuation period is the result of market 
conditions. The term market conditions is defined as events outside of 
the control of the decedent (or the decedent's executor or trustee) or 
other person whose property is being valued that affect the fair market 
value of the property being valued. Changes in value due to mere lapse 
of time or to other post-death events other than market conditions will 
be ignored in determining the value of decedent's gross estate under 
the alternate valuation method.
    (2) Mere lapse of time. * * * The application of this paragraph 
(f)(2) is illustrated in paragraphs (f)(2)(i) and (f)(2)(ii) of this 
section:
* * * * *
    (3) Post-death events--(i) In general. In order to eliminate 
changes in value due to post-death events other than market conditions, 
any interest or estate affected by post-death events other than market 
conditions 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, 
with adjustment for any change in value that is due to market 
conditions. The term post-death events includes, but is not limited to, 
a reorganization of an entity (for example, corporation, partnership, 
or limited liability company) in which the estate holds an interest, a 
distribution of cash or other property to the estate from such entity, 
or one or more distributions by the estate of a fractional interest in 
such entity.
    (ii) Examples. The following examples illustrate the application of 
this paragraph (f)(3). In each example, decedent's (D's) estate elects 
to value D's gross estate under the alternate valuation method, so that 
the valuation date of the property included in D's gross estate as of 
D's date of death is either the date the property is distributed, sold, 
exchanged, or disposed of under section 2032(a)(1) (the date of 
distribution (distribution date)) or the date that is 6 months after 
the date of the decedent's death under section 2032(a)(2) (the six 
month alternate valuation date (AVD)).

    Example 1. At D's death, D owned common stock in Corporation, a 
closely-held subchapter C corporation. At that time, the common 
stock was not subject to transfer restrictions. D's stock was valued 
at $50X at the date of death. Two months after D's death, D's estate 
participated in a tax-free

[[Page 22303]]

reorganization of Corporation that qualified under section 368(a) 
with respect to which no gain or loss was recognized for income tax 
purposes under section 354 or 355. Pursuant to the reorganization, 
D's estate opted to exchange its stock for stock subject to transfer 
restrictions. Although the value of the stock did not change during 
the alternate valuation period, discounts for lack of marketability 
and lack of control (totaling $20X) were applied in determining the 
value of the stock held by D's estate on the AVD, and D's estate 
reported the value of the stock on the AVD as $30X. Because the 
claimed reduction in value is not attributable to market conditions, 
the discounts may not be taken into account in determining the value 
of the stock on the AVD. Accordingly, the value on the AVD is $50X.
    Example 2. The facts are the same as in Example 1 except that 
the value of the stock declined from $50X to $40X during the 
alternate valuation period because of changes in market conditions 
during that period. D's estate may report the value of the stock as 
$40X on the AVD. As in Example 1, however, no discounts resulting 
from the reorganization are allowed in computing the value on the 
AVD.
    Example 3. At D's death, D owned property valued at $100X. Two 
months after D's death, the executor of D's estate and other family 
members formed four limited partnerships. The estate contributed the 
estate's property to the partnerships in exchange for a 25% interest 
in each partnership. Discounts for lack of marketability and lack of 
control (totaling $25X) were applied in determining the value of the 
estate's partnership interests, and the estate reported $75X as the 
total value of the estate's partnership interests on the AVD. 
Because the reduction in value is not attributable to market 
conditions, the discounts for lack of marketability and control may 
not be taken into account in determining the value of the 
partnership interests on the AVD. The result would be the same if 
the limited partnerships were formed prior to D's death, and the 
estate transferred property into the partnerships after D's death 
but prior to the AVD.
    Example 4. At D's death, D owned 100% of the units of a limited 
liability company (LLC). The executor elected the alternative 
valuation method. During the 6 months following D's death and in 
accordance with D's will, the executor made 6 distributions, each to 
a different residuary legatee on a different date and each of a 10% 
interest in the LLC. Pursuant to section 2032(a)(1), each 
distribution is valued on the distribution date. On the AVD, the 
estate held 40% of the units in the LLC. Pursuant to section 
2032(a)(2), the 40% is valued on the AVD. In valuing the 10% 
interests distributed and the 40% interest held on the AVD, 
discounts for lack of control and lack of marketability were 
applied. The reduction in value of the units is not attributable to 
market conditions. Accordingly, the discounts for lack of 
marketability and control may not be taken into account in 
determining the value of the units distributed or held by the 
estate. The value of each 10% distribution is determined by taking 
10% of the value on the distribution date of the units (100%) owned 
by the estate at D's death. The value of the units held by the 
estate on the AVD is determined by taking 40% of the value on the 
AVD of all of the units (100%) owned by the estate at D's death. If 
because of market conditions, the units had declined in value as of 
each distribution date or as of the AVD, D's estate would take such 
reduction in value into account.
    Example 5. D died owning 100% of Blackacre. D's will directs 
that Blackacre be divided between two trusts, 70% to Trust A for the 
benefit of S, D's surviving spouse, and 30% to Trust B for the 
benefit of C, D's surviving child. The executor of D's estate 
distributed a 70% interest in Blackacre to Trust A three months 
after D's death, and distributed a 30% interest in Blackacre to 
Trust B four months after D's death. On the estate tax return, the 
executor elected to value the estate's property under the alternate 
valuation method under section 2032. There was no change in the 
value of Blackacre during the four-month period following D's death. 
The 70% interest in Blackacre is to be valued as of the distribution 
date to Trust A, and that value is determined by taking 70% of the 
value of all (100%) of Blackacre as of the distribution date. The 
30% interest in Blackacre is to be valued as of the distribution 
date to Trust B, and that value is determined by taking 30% of the 
value of all (100%) of Blackacre as of the distribution date. If, 
however, because of market conditions such as a decline in the real 
estate market, Blackacre's value had declined by 10% between D's 
date of death and the distribution date of the 30% interest, the 
value of the 30% interest would be determined by ascertaining 30% of 
the value of all (100%) of Blackacre as of the distribution date, 
which would equal 30% of 90% of the date of death value of 
Blackacre.
* * * * *
    (h) Effective/applicability date. * * * The fourth sentence of 
paragraph (f)(2)(i) of this section is applicable to decedents dying 
after May 1, 1999, subject to transition rules for certain 
incapacitated individuals. The fifth sentence of paragraph (f)(2)(i) of 
this section is applicable to decedents dying after November 30, 1983, 
subject to transition rules for certain incapacitated individuals. The 
first, second, and third sentences of paragraph (f)(2)(i), paragraph 
(f)(2)(ii), and all but the last sentence in paragraph (f)(2) of this 
section are applicable to decedents dying after August 16, 1954. When 
adopted as final regulations, the rules contained in paragraphs (f)(1), 
(f)(3), and the last sentence of paragraph (f)(2) of this section, will 
be made applicable to estates of decedents dying on or after April 25, 
2008.
* * * * *

 Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
 [FR Doc. E8-9025 Filed 4-24-08; 8:45 am]
BILLING CODE 4830-01-P