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IRS Unveils Section 2053 Estate Regs

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The Internal Revenue Service has completed work on final rules that could make it easier for estate administrators to handle deductions for claims against estates.

The final regulations, which appear today in the Federal Register, relate “to the amount deductible from a decedent’s gross estate for claims against the estate under section 2053(a)(3) of the Internal Revenue Code,” officials write in a preamble to the regulations.

The final regulations, which take effect today, also update rules relating to the state death tax deduction to reflect changes Congress made in 2001 to sections 2053(d) and 2058 of the Internal Revenue Code.

“The regulations primarily will affect estates of decedents against which there are claims outstanding at the time of the decedent’s death,” officials write.

Section 2053(a) lets estates take deductions for funeral expenses, administration expenses, claims against the estate, and “unpaid mortgages on, or any indebtedness in respect of, property where the value of the decedent’s interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate.”

“The amount an estate may deduct for claims against the estate has been a highly litigious issue,” officials note.

Section 2053(a) does not contain a specific order to value a deductible claim at its value at the time of the decedent’s death.

“The lack of consistency in the case law has resulted in different estate tax treatment of estates that are similarly situated, depending only upon the jurisdiction in which the executor resides,” officials write. “The Treasury Department and the IRS believe that similarly-situated estates should be treated consistently by having section 2053(a)(3) construed and applied in the same way in all jurisdictions.”

Treasury and IRS officials tried to address those concerns in proposed regulations released in April 2007.

“The proposed regulations proposed amendments to the regulations under Section 2053 to clarify that events occurring after a decedent’s death are to be considered when determining the amount deductible under all provisions of Section 2053 and that deductions under Section 2053 generally are limited to amounts actually paid by the estate in satisfaction of deductible expenses and claims,” officials write.

“The proposed regulations also proposed amendments to address more specifically issues involving final court decisions, settlements, protective claims, reimbursed amounts, claims that are potential, unmatured, or contested, claims involving multiple defendants, claims by a family member or beneficiary of a decedent’s estate, unenforceable claims, recurring payments, and the changes made to section 2053(d) in 2001,” officials write.

Officials made some changes in response to comments, and now are adopting the revised regulations, but they say they will be coming out with more proposed regulations and guidance on the issues involved.

The proposed regulations provided that only claims actually paid by the estate may be deducted under Section 2053(a)(3).

“Many commentators disagreed with this approach and suggested that claims against a decedent’s estate be valued on the basis of what was reasonably known on the date of the decedent’s death,” officials write.

Court opinions on the issue diverged, officials note.

“After giving serious consideration to the comments submitted on this issue, the Treasury Department and the IRS continue to believe that a deduction for claims under Section 2053(a)(3) only for amounts actually paid by the estate most closely aligns with the legislative intent behind Section 2053 and its predecessors and best furthers the goal of effective and fair administration of the tax laws,” officials write. “Accordingly, the final regulations generally maintain the approach of the proposed regulations.”

To make that approach more administrable, the final regulations include several exceptions, officials report.

One is for claims “against the estate with respect to which there is an asset or claim includible in the gross estate that is substantially related to the claim against the estate.”

Another is for claims against the estate that, collectively, do not exceed $500,000.

Other comments and changes deal with issue such as protective claims for refunds and the effect of the regulations on marital and charitable deductions.


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