Deductions

March 13, 2024

742 / What value of property contributed to charity can be considered for purposes of the charitable deduction if the gift is comprised of tangible personal property?

<div class="Section1">The treatment of a contribution of appreciated tangible personal property (i.e., property which, if sold, would generate long-term capital gain) depends on whether the use of the property is related or unrelated to the purpose or function of the (public or governmental) organization. If the property is related use property (e.g., a contribution of a painting to a museum), generally the full fair market value is deductible, up to 30 percent of the individual’s adjusted gross income; however, if the property is unrelated use property, the deduction is generally limited to the donor’s adjusted basis.<a href="#_ftn1" name="_ftnref1">1</a></div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC §§ 170(e)(1)(B), 170(b)(1)(C); Treas. Reg. § 1.170A-4(b). </div>

March 13, 2024

745 / What are the limits on the medical expense deduction?

<div class="Section1">Editor’s Note: The 2021 year-end Consolidated Appropriations Act permanently reduced the medical expense deduction threshold from 10 percent to 7.5 percent.<div></div><div>A taxpayer who itemizes deductions can deduct unreimbursed expenses for “medical care” (the term “medical care” includes dental care) and expenses for prescribed drugs or insulin for himself, a spouse and dependents, to the extent that such expenses exceed 7.5 percent -of adjusted gross income. (On a joint return, the 7.5 percent floor amount is based on the combined adjusted gross income of both spouses.) The taxpayer first determines net unreimbursed expenses by subtracting all reimbursements received during the year from total expenses for medical care paid during the year. He or she must then subtract 7.5 percent of his adjusted gross income from net unreimbursed medical expenses; only the balance, if any, is deductible.<a href="#_ftn1" name="_ftnref1">1</a> The deduction for medical expenses was not subject to the phaseout in itemized deductions for certain upper income taxpayers that applied before 2018. (See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="731">731</a>.) However, the 2025 OBBB created a new limit on itemized deductions effective in 2026. That limit does not contain an exception or carveout for the medical expense deduction.  See Q 732 for details.</div><div class="Section1"> Though the 7.5 percent threshold was temporarily increased to 10 percent in 2013-2016, the 7.5 percent threshold continued to apply through 2016 if the taxpayer or the taxpayer’s spouse turned age 65 before the end of the taxable year. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for examples of the types of expenses that can be deducted under the medical expense deduction. </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 213. </div></div>

March 13, 2024

751 / Can a self-employed taxpayer deduct medical insurance costs?

<div class="Section1"> A sole proprietor who purchases health insurance in his individual name has established a plan providing medical care coverage with respect to his trade or business, and therefore may deduct the medical care insurance costs for himself, his spouse, and dependents under IRC Section 162(l), but only to the extent the cost of the insurance does not exceed the earned income derived by the sole proprietor from the specific trade or business with respect to which the insurance was purchased. A self-employed individual may deduct the medical care insurance costs for himself and his spouse and dependents under a health insurance plan established for his trade or business up to the net earnings of the specific trade or business with respect to which the plan is established, but a self-employed individual may not add the net profits from all his trades and businesses for purposes of determining the deduction limit under IRC Section 162(l)(2)(A). However, if a self-employed individual has more than one trade or business, he may deduct the medical care insurance costs of the self-employed individual and his spouse and dependents under each specific health insurance plan established under each specific business up to the net earnings of that specific trade or business.<a href="#_ftn1" name="_ftnref1">1</a> In a legal memorandum, the IRS ruled that a self-employed individual may not deduct the costs of health insurance on Schedule C. The deduction under IRC section 162(l) must be claimed as an adjustment to gross income on the front of Form 1040.<a href="#_ftn2" name="_ftnref2">2</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. CCA 200524001. <a href="#_ftnref2" name="_ftn2">2</a>. CCA 200623001. </div>

March 13, 2024

740 / What are the income percentage limits that apply to charitable contributions?

<div class="Section1">Editor’s Note: The 2017 tax reform legislation increased the 50 percent AGI limit on contributions to public charities and certain private foundations to 60 percent for tax years beginning after 2017. The 2025 OBBB made the change permanent.<div></div><div>Sixty percent limit (50 percent prior to 2018). An individual is allowed a charitable deduction of up to 60 percent of his adjusted (60 percent for tax years 2018-2025) for a charitable contribution to: churches; schools; hospitals or medical research organizations; organizations that normally receive a substantial part of their support from federal, state, or local governments or from the general public and that aid any of the above organizations; federal, state, and local governments. Also included in this list is a limited category of private foundations (i.e., private operating foundations and conduit foundations<a href="#_ftn3" name="_ftnref3">1</a>) that generally direct their support to public charities.<a href="#_ftn4" name="_ftnref4">2</a> The above organizations are often referred to as “60 percent-type charitable organizations.”</div><div class="Section1"> Thirty percent limit. The deduction for contributions of most long-term capital gain property to the above organizations, contributions for the use of any of the above organizations, as well as contributions (other than long-term capital gain property, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="741">741</a>) to or for the use of any other types of charitable organizations (i.e., most private foundations, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="743">743</a>) is limited to the lesser of (a) 30 percent of the taxpayer’s adjusted gross income, or (b) 50 percent of adjusted gross income minus the amount of charitable contributions allowed for contributions to the 60 percent-type charities.<a href="#_ftn5" name="_ftnref5">3</a> Twenty percent limit. The deduction for contributions of long-term capital gain property to most private foundations (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="741">741</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="743">743</a>) is limited to the lesser of (a) 20 percent of the taxpayer’s adjusted gross income, or (b) 30 percent of adjusted gross income minus the amount of charitable contributions allowed for contributions to the 30 percent-type charities.<a href="#_ftn6" name="_ftnref6">4</a> Deductions denied because of the 60 percent, 30 percent or 20 percent limits may be carried over and deducted over the next five years, retaining their character as 60 percent, 30 percent or 20 percent type deductions.<a href="#_ftn7" name="_ftnref7">5</a> Gifts are “to” a charitable organization if made directly to the organization. “For the use of” applies to indirect contributions to a charitable organization (e.g., an income interest in property, but not the property itself).<a href="#_ftn8" name="_ftnref8">6</a> The term “for the use of” does not refer to a gift of the right to use property. Such a gift would generally be a nondeductible gift of less than the donor’s entire interest. </div>COVID-Era Changes Under the CARES Act Editor’s Note 2: The 2020 CARES Act made several changes designed to encourage charitable giving during the COVID-19 outbreak. For the 2020 and 2021 tax years, the CARES Act amended IRC Section 62(a), allowing taxpayers to reduce adjusted gross income (AGI) by $300 worth of charitable contributions made in 2020 and 2021 even if they do not itemize.<a href="#_ftn8" name="_ftnref8">7</a> The year-end stimulus package passed in December 2020 extended this temporary relief through 2021. The CARES Act also lifted the 60 percent AGI limit for 2020. This relief was also extended through 2021. Cash contributions to public charities and certain private foundations in 2020 were not subject to the AGI limit (contributions to donor advised funds, supporting organizations and private grant-making organizations remained subject to the usual AGI limits). Individual taxpayers can offset their income for 2020 up to the full amount of their AGI, and additional charitable contributions can be carried over to offset income in a later year (the amounts are not refundable). The corporate AGI limit was raised from 10 percent to 25 percent (excess contributions also carry over to subsequent tax years). Taxpayers must elect this treatment.<a href="#_ftn8" name="_ftnref8">8</a><a href="#_ftn2" name="_ftnref2"></a> <a href="#_ftnref1" name="_ftn1"></a> <div class="refs"> <hr align="left" size="1" width="33%"> 1. IRC § 170(b)(1)(E). <a href="#_ftnref4" name="_ftn4">2</a>. IRC § 170(b)(1)(A). <a href="#_ftnref5" name="_ftn5">3</a>. IRC §§ 170(b)(1)(B), 170(b)(1)(C). <a href="#_ftnref6" name="_ftn6">4</a>. IRC § 170(b)(1)(D). <a href="#_ftnref7" name="_ftn7">5</a>. IRC §§ 170(d)(1), 170(b)(1)(D)(ii). 6. Treas. Reg. § 1.170A-8(a)(2). 7<a href="#_ftnref1" name="_ftn1">. </a> IRC § 62(a)(22), added by the 2020 CARES Act. <a href="#_ftnref2" name="_ftn2"></a><a href="#_ftnref6" name="_ftn6">8</a><a href="#_ftnref2" name="_ftn2">. </a>CARES Act § 2205. </div></div>

March 13, 2024

747 / What is income in respect of a decedent and how is it taxed?

<div class="Section1">“Income in respect of a decedent” (IRD) refers to those amounts to which a decedent was entitled as gross income, but that were not includable in his taxable income for the year of his death.<a href="#_ftn1" name="_ftnref1">1</a> It can include, for example: renewal commissions of a sales representative; payment for services rendered before death or under a deferred compensation agreement; and proceeds from sales on the installment method (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="667">667</a>). Generally, if stock is acquired in an S corporation from a decedent, the pro rata share of any income of the corporation that would have been IRD if that item had been acquired directly from the decedent is IRD.<a href="#_ftn2" name="_ftnref2">2</a><div></div><div>The IRS has determined that a distribution from a qualified plan of the balance as of the employee’s death is IRD.<a href="#_ftn3" name="_ftnref3">3</a> The Service has also privately ruled that a distribution from a 403(b) tax sheltered annuity is IRD.<a href="#_ftn4" name="_ftnref4">4</a> The Service has also concluded that a death benefit paid to beneficiaries from a deferred variable annuity would be IRD to the extent that the death benefit exceeded the owner’s investment in the contract.<a href="#_ftn5" name="_ftnref5">5</a> In addition, the Service has determined that distributions from a decedent’s individual retirement account were IRD, including those parts of the distributions used to satisfy the decedent’s estate tax obligation, since the individual retirement account was found to have automatically vested in the beneficiaries.<a href="#_ftn6" name="_ftnref6">6</a></div><div class="Section1"> However, a rollover of funds from a decedent’s IRA to a marital trust and then to the surviving spouse’s IRA was not IRD, according to the Service, where the surviving spouse was the sole trustee and sole beneficiary of the trust.<a href="#_ftn7" name="_ftnref7">7</a> The Service also ruled that designation of a QTIP trust as the beneficiary of a decedent’s account balance in a qualified profit sharing plan would not result in the acceleration of IRD at the time the assets from the plan passed into the trust. Consequently, the taxpayer would include the amounts of IRD in the plan in the taxpayer’s gross income only when the taxpayer received a distribution (or distributions) from the trust.<a href="#_ftn8" name="_ftnref8">8</a> Gain realized upon the cancellation at death of a note payable to a decedent has been held to be IRD to the decedent’s estate.<a href="#_ftn9" name="_ftnref9">9</a> The unreported increase in value reflected in the redemption value of savings bonds as of the date of a decedent’s death constitutes income in respect of a decedent.<a href="#_ftn10" name="_ftnref10">10</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7688">7688</a>. If savings bonds on which the increases in value have not been reported are inherited, or the subject of a bequest, the reporting of such amounts may be delayed until the bonds are redeemed or disposed of by the legatee, or reach maturity, whichever is first.<a href="#_ftn11" name="_ftnref11">11</a> However, to the extent savings bonds are distributed by an estate or trust to satisfy pecuniary obligations or legacies, the estate or trust is required to recognize the unreported incremental increase in the redemption price of Series E bonds as income in respect of a decedent.<a href="#_ftn12" name="_ftnref12">12</a> The Service determined that in the case of a taxpayer who dies before a short sale of stock is closed, any income that may result from the closing of the short sale is not IRD, and the basis of any stock held on the date of the taxpayer’s death will be stepped up.<a href="#_ftn13" name="_ftnref13">13</a> The Service also privately ruled that in the case of a sales contract entered into before the decedent’s death, where an economically material contingency existed at the time of the decedent’s death that might have disrupted the sale of the real property, any gain realized from the sale of the real property after the decedent’s death did not constitute IRD.<a href="#_ftn14" name="_ftnref14">14</a> The Court of Appeals for the 10th Circuit has held that an alimony arrearage paid to the estate of a former spouse was IRD and thus, taxable to the recipient beneficiaries as ordinary income.<a href="#_ftn15" name="_ftnref15">15</a> The Tax Court determined that because a signed withdrawal request from the decedent constituted an effective exercise of the decedent’s right to a lump-sum distribution during his lifetime, the lump-sum distribution from TIAA-CREF was therefore income to the decedent and properly includable in the decedent’s income. Accordingly, the court held, the lump sum payment received by the decedent’s son was not a death benefits payment and, thus, was not includable in the son’s gross income as IRD.<a href="#_ftn16" name="_ftnref16">16</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC § 691(a). <a href="#_ftnref2" name="_ftn2">2</a>.   IRC § 1367(b). <a href="#_ftnref3" name="_ftn3">3</a>.   Rev. Rul. 69-297, 1969-1 CB 131; Rev. Rul. 75-125, 1975-1 CB 254. <a href="#_ftnref4" name="_ftn4">4</a>.   Let. Rul. 9031046. <a href="#_ftnref5" name="_ftn5">5</a>.   Let. Rul. 200041018. <a href="#_ftnref6" name="_ftn6">6</a>.   Let. Rul. 9132021. See Rev. Rul. 92-47, 1992-1 CB 198. See also Let. Rul. 200336020. <a href="#_ftnref7" name="_ftn7">7</a>.   Let. Rul. 200023030. <a href="#_ftnref8" name="_ftn8">8</a>.   Let. Rul. 200702007. <a href="#_ftnref9" name="_ftn9">9</a>.   Estate of Frane v. Commissioner, 998 F.2d 567 (8th Cir. 1993). <a href="#_ftnref10" name="_ftn10">10</a>. Rev. Rul. 64-104, 1964-1 CB 223. <a href="#_ftnref11" name="_ftn11">11</a>. Let. Ruls. 9845026, 9507008, 9024016. <a href="#_ftnref12" name="_ftn12">12</a>. Let. Rul. 9507008. <a href="#_ftnref13" name="_ftn13">13</a>. Let. Rul. 9436017. See IRC § 1014. <a href="#_ftnref14" name="_ftn14">14</a>. Let. Rul. 200744001. <a href="#_ftnref15" name="_ftn15">15</a>. Kitch v. Commissioner, 103 F. 3d 104, 97-1 USTC ¶ 50,124 (10th Cir. 1996). <a href="#_ftnref16" name="_ftn16">16</a>.  Eberly v. Commissioner, TC Summary Op. 2006-45. </div></div>

March 13, 2024

744 / What substantiation requirements apply for a taxpayer to take an income tax deduction for charitable contributions?

<div class="Section1">No charitable deduction is allowed for a contribution of cash, check, or other monetary gift unless the donor maintains either a bank record or a written communication from the donee showing the name of the organization and the date and the amount of the contribution.<a href="#_ftn1" name="_ftnref1">1</a></div> <div class="Section1"> Charitable contributions of $250 or more (whether in cash or property) must be substantiated by a contemporaneous written acknowledgment of the contribution supplied by the charitable organization. (An organization can provide the acknowledgement electronically, such as via an e-mail addressed to the donor.)<a href="#_ftn2" name="_ftnref2">2</a> In prior years, substantiation was not required if certain information was reported on a return filed by the charitable organization (this exception was repealed by the 2017 TJCA for tax years beginning after December 31, 2016).<a href="#_ftn3" name="_ftnref3">3</a> Special rules apply to the substantiation and disclosure of quid pro quo contributions and contributions made by payroll deduction.<a href="#_ftn4" name="_ftnref4">4</a> A qualified appraisal is generally required for contributions of nonreadily valued property for which a deduction of more than $5,000 is claimed.<a href="#_ftn5" name="_ftnref5">5</a> No charitable deduction is allowed for a contribution of clothing or a household item unless the property is in good or used condition. Regulations may deny a deduction for a contribution of clothing or a household item which has minimal monetary value. These rules do not apply to a contribution of a single item if a deduction of more than $500 is claimed and a qualified appraisal is included with the return. Household items include furniture, furnishings, electronics, linens, appliances, and similar items; but not food, art, jewelry, and collections.<a href="#_ftn6" name="_ftnref6">6</a> Special rules apply to certain types of gifts, including charitable donations of patents and intellectual property, and for donations of used motor vehicles, boats, and airplanes.<a href="#_ftn7" name="_ftnref7">7</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 170(f)(17). <a href="#_ftnref2" name="_ftn2">2</a>. IRS Pub. 1771 (March 2016), p. 5. <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 170(f)(8) (repealed by Pub. Law. No. 115-97). <a href="#_ftnref4" name="_ftn4">4</a>. Treas. Reg. §§ 1.170A-13(f), 1.6115-1. <a href="#_ftnref5" name="_ftn5">5</a>. IRC § 170(f)(11). <a href="#_ftnref6" name="_ftn6">6</a>. IRC § 170(f)(16). <a href="#_ftnref7" name="_ftn7">7</a>. IRC §§ 170(e)(1)(B), 170(f)(11), 170(f)(12), 170(m); Notice 2005-44, 2005-25 IRB 1287. </div>

March 13, 2024

739 / What is the maximum annual limit on the income tax deduction allowable for charitable contributions?

<div class="Section1"> Editor’s Note: The OBBB created a new charitable deduction for taxpayers who do not itemize deductions.  Taxpayers who do not itemize deductions can claim an above-the-line deduction charitable contributions of up to $1,000 ($2,000 for joint returns).  Taxpayers who do itemize will only be entitled to deduct contributions to the extent they exceed 0.5% of the taxpayer’s AGI (that disallowed portion may be carried forward if the taxpayer has other charitable contribution carryforwards for the tax year).  For corporations, the deduction is allowed only to the extent that it exceeds 1.0% of the corporation’s taxable income. An individual who itemizes may take a deduction for certain contributions “to” or “for the use of” charitable organizations. The amount that may be deducted by an individual in any one year is subject to the income percentage limitations as explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="740">740</a>.The value that may be taken into account for various gifts of property depends on the type of property and the type of charity to which it is contributed. These rules are explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="741">741</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="743">743</a>.<div class="Section1"> For an explanation of the deduction for charitable gifts of life insurance, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="120">120</a>. In the case of a gift of S corporation stock, special rules (similar to those relating to the treatment of unrealized receivables and inventory items under IRC Section 751) apply in determining whether gain on such stock is long-term capital gain for purposes of determining the amount of a charitable contribution.<a href="#_ftn1" name="_ftnref1">1</a> A contribution of a partial interest in property is deductible only if the donee receives an undivided portion of the donor’s entire interest in the property. Such a contribution was upheld even where the donee did not take possession of the property during the tax year.<a href="#_ftn2" name="_ftnref2">2</a> Generally, a deduction is denied for the mere use of property or for any interest which is less than the donor’s entire interest in the property, unless the deduction would have been allowable if the transfer had been in trust. </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 170(e)(1). <a href="#_ftnref2" name="_ftn2">2</a>. Winokur v. Commissioner, 90 TC 733 (1988), acq. 1989-1 CB 1. </div></div>

March 13, 2024

741 / What value of property contributed to charity can be considered for the charitable deduction if the gift is long-term capital gain property?

<div class="Section1"> Editor’s Note: The 2017 tax reform legislation increased the 50 percent AGI limit on contributions to public charities and certain private foundations to 60 percent for tax years beginning after 2017 and before 2026. The 2025 OBBB made the change permanent. If an individual makes a charitable contribution to a 60 percent-type charity (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="740">740</a>) of property that, if sold, would have resulted in long-term capital gain (other than certain tangible personal property, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="742">742</a>), he is generally entitled to deduct the full fair market value of the property, but the deduction will be limited to 30 percent of adjusted gross income.<a href="#_ftn1" name="_ftnref1">1</a> <div class="Section1"> Long-term capital gain property. “Long-term capital gain” means “gain from the sale or exchange of a capital asset held for more than one year, if and to the extent such gain is taken into account in computing gross income.”<a href="#_ftn2" name="_ftnref2">2</a> Any portion of a gift of long-term capital gain property to a 60 percent-type organization that is disallowed as a result of the adjusted gross income limitation may be carried over for five years, retaining its character as a 30 percent type deduction (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="740">740</a>).<a href="#_ftn3" name="_ftnref3">3</a> A taxpayer may elect in any year to have gifts of long-term capital gain property be subject to a 50 (or 60) percent of adjusted gross income limit; if he does so, the gift is valued at the donor’s adjusted basis. Once made, such an election applies to all contributions of capital gain property during the taxable year (except unrelated use gifts of appreciated tangible personal property, as explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="742">742</a>) and is generally irrevocable for that year.<a href="#_ftn4" name="_ftnref4">4</a> The deduction for any charitable contribution of property is reduced by the amount of gain that would not be long-term capital gain if the property were sold at its fair market value at the time of the contribution.<a href="#_ftn5" name="_ftnref5">5</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 170(b)(1)(C). <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 1222(3). <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 170(b)(1)(C)(ii). <a href="#_ftnref4" name="_ftn4">4</a>. IRC § 170(b)(1)(C)(iii); Woodbury v. Commissioner, TC Memo 1988-272, aff’d, 90-1 USTC ¶ 50,199 (10th Cir. 1990). <a href="#_ftnref5" name="_ftn5">5</a>. IRC § 170(e)(1)(A). </div></div>

March 13, 2024

743 / What value of property contributed to charity can be considered for purposes of the charitable deduction if the gift is made to a private foundation?

March 13, 2024

748 / Is the recipient of income in respect of a decedent (IRD) entitled to an income tax deduction for estate and generation-skipping transfer taxes paid on this income?

<div class="Section1">Generally, IRD must be included in the gross income of the recipient; however, a deduction is normally permitted for estate and generation-skipping transfer taxes paid on the income. The amount of the total deduction is determined by computing the federal estate tax (or generation-skipping transfer tax) with the net IRD included and then recomputing the tax with the net IRD excluded. The difference in the two results is the amount of the income tax deduction. However, if two or more persons receive IRD of the same decedent, each recipient is entitled to only a proportional share of the income tax deduction. Similarly, if the IRD is received over more than one taxable year, only a proportional part of the deduction is allowable each year. Where the income would have been ordinary income in the hands of the decedent, the deduction is an itemized deduction.<a href="#_ftn1" name="_ftnref1">1</a> The recipient does not receive a stepped up basis (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="692">692</a>).<a href="#_ftn2" name="_ftnref2">2</a> A beneficiary was allowed to claim a deduction for IRD attributable to annuity payments that had been received even though the estate tax had not yet been paid.<a href="#_ftn3" name="_ftnref3">3</a><div class="Section1"> In technical advice, the IRS stated that the value of a decedent’s IRA should not be discounted for estate tax purposes to reflect income taxes that will be payable by the beneficiaries upon receipt of distributions from the IRAs or for lack of marketability. The Service reasoned that the deduction is a statutory remedy for the adverse income tax impact and makes any valuation discount inappropriate if the deduction applies.<a href="#_ftn4" name="_ftnref4">4</a> Courts have likewise denied discounts for lack of marketability.<a href="#_ftn5" name="_ftnref5">5</a> The Service also determined that a deduction claimed on a decedent’s estate tax return – which represented income taxes paid by the estate on the estate’s income tax return, which in turn were triggered by the amount distributed to the estate from the decedent’s IRAs – was not allowable as a deduction under IRC Section 2053. According to the Service, even if the estate had not claimed the IRD deduction, the income taxes paid on the distributions from the IRAs would still not be deductible under IRC Section 2053 because any additional benefit beyond what Congress had intended would be unwarranted.<a href="#_ftn6" name="_ftnref6">6</a> The Service has ruled that if the owner-annuitant of a deferred annuity contract dies before the annuity starting date, and the beneficiary receives a death benefit under the annuity contract, the amount received by the beneficiary in a lump sum in excess of the owner-annuitant’s investment in the contract is includible in the beneficiary’s gross income as IRD. If the death benefit is instead received in the form of a series of periodic payments, the amounts received are likewise includible in the beneficiary’s gross income in an amount determined under IRC Section 72 as IRD.<a href="#_ftn7" name="_ftnref7">7</a> See, e.g., Let. Rul. 200537019 (where the Service ruled that the amount equal to the excess of the contract’s value over the decedent’s basis, which would be received by the estate as the named beneficiary of the contract upon surrender of the contract, would constitute IRD includible by the estate in its gross income; however, the estate would be entitled to a deduction for the amounts of IRD paid to charities in the taxable year, or for the remaining amounts of IRD that would be set aside for charitable purposes). In Estate of Kahn,<a href="#_ftn8" name="_ftnref8">8</a> the Tax Court held that in computing the gross estate value, the value of the assets held in the IRAs is not reduced by the anticipated income tax liability following the distribution of IRAs, in part because IRC Section 691(c) addresses the potential double tax issue. The Tax Court further held that a discount for lack of marketability is not warranted because the assets in the IRAs are publicly traded securities. Payment of the tax upon distribution is not a prerequisite to making the assets in the IRA marketable; consequently there is no basis for the discount. In technical advice the Service has also determined that a discount for lack of marketability is not available to an estate where the deduction for IRD is available to mitigate the potential income tax liability triggered by the IRD assets.<a href="#_ftn9" name="_ftnref9">9</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 691(c); Rev. Rul. 78-203, 1978-1 CB 199. <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 1014(c). <a href="#_ftnref3" name="_ftn3">3</a>. FSA 200011023. <a href="#_ftnref4" name="_ftn4">4</a>. TAM 200247001; see also TAM 200303010. <a href="#_ftnref5" name="_ftn5">5</a>. Estate of Smith v. U.S., 300 F. Supp. 2d 474 (S.D. TX 2004), appeal docketed, No. 04-20194 (5th Cir. 2004); Estate of Robinson v. Commissioner, 69 TC 222 (1977). <a href="#_ftnref6" name="_ftn6">6</a>. Let. Rul. 200444021. <a href="#_ftnref7" name="_ftn7">7</a>. Rev. Rul. 2005-30, 2005-20 IRB 1015. <a href="#_ftnref8" name="_ftn8">8</a>. 125 TC 227 (2005). <a href="#_ftnref9" name="_ftn9">9</a>. TAM 200247001; see also TAM 200303010. </div></div>