Section 2053 final regulations: continued uncertainty?

• Author: Spallina, Robert L.

On October 20, 2009, the Treasury Department issued final regulations under Code [section]2053, effective for decedents dying on or after that date. (1) Section 2053 allows deductions for funeral expenses, administration expenses, claims against the estate, and most indebtedness in arriving at the taxable estate. Very often there is an inherent difficulty in determining the value of a taxable estate due to post-mortem events extending beyond the filing period for the estate tax return. The proposed regulations under [section]2053 provided that post-death events are to be considered in determining deductible amounts. With recurring expenses and lengthy litigation that can continue long after the filing of the estate tax return, and in response to fears of protracted administration and tax motivated litigation strategies, the Treasury issued the final regulations to clarify its position and provide guidance on the most complicated and controversial of deduction issues: administration expenses and claims against an estate. (2)

Actual Payment Requirement

Consistent with the proposed regulations, the most significant of the changes under the final regulations requires practitioners to deduct administration expenses and enforceable claims only as they are paid and to the extent they are actually paid. This rule requires personal representatives to pay claims and expenses prior to the estate tax return being filed, or file supplemental returns for additional deductions and seek refunds for tax overpayments. In an effort to ease the burden placed on estate administration by the new "must be paid" rule, three exceptions were created for personal representatives under the final regulations: 1) reasonably ascertainable amounts, 2) claims in the aggregate totaling $500,000 or less, and 3) claims and counterclaims related to assets of the estate.

* Reasonably Ascertainable Amounts--The first exception allows deductions for claims or expenses when the amount is ascertainable with reasonable certainty and will be paid. (3) With few exceptions, contested or contingent claims generally fail to meet the reasonable certainty exception. This exception was originally packaged as "estimated amounts," but the Treasury modified its title, intending no substantial changes. (4) The regulation cites a personal representative's estimated compensation amount based on a local statute as an example of an ascertainable amount. The deduction of personal representative's fees and attorneys' fees in this manner has been long-standing with the IRS, and its inclusion in the regulations serves only to further solidify its status in practice. While expenses are usually ascertainable with reasonable certainty, the question remains as to what types of claims can be determined with "reasonable certainty."

The final regulations specifically exclude vague and uncertain estimates and contested or contingent claims and expenses from using the reasonable certainty exception. Extending well beyond the filing period for an estate tax return, recurring payments for noncontingent obligations will be allowed a deduction as an amount ascertainable with reasonable certainty if all of the requirements are met. (5) Recurring payments that are contingent upon death or remarriage are treated as noncontingent under the regulations and, thus, are ascertainable for purposes of this exception. To determine the value of such payments, life expectancy tables must be used, and the IRS has indicated that it will supply a remarriage factor.

Under the proposed language and as noted in the preamble, the regulations sought to allow deductions only for the date of death present value of recurring noncontingent obligations. The Treasury Department and the IRS later dropped this requirement to promote consistent treatment relative to contingent claims that could be deducted in full. Nonetheless, the present value is regarded as the more appropriate figure, and [section]20.20531(d)(6) is reserved for future guidance on this issue. As an alternative for the satisfaction of recurring obligations, personal representatives can purchase a commercial annuity from an unrelated dealer and deduct the sum of 1) the amount paid for the commercial annuity, 2) amounts paid prior to the purchase of the annuity in satisfaction of the obligation, and 3) any additional amount in excess of the commercial annuity amount necessary to satisfy the obligation. (6)

* Claims Totaling $500,000 or Less--The last two exceptions to the "must be paid" rule are found within [section]20.2053-4 of the final regulations following the review of general deductibility requirements for claims against an estate representing personal obligations of the decedent at the time of the decedent's death. The first of these relates to claims totaling not more than $500,000. (7) It should be noted that this exception applies only to...