[Federal Register Volume 87, Number 123 (Tuesday, June 28, 2022)]
[Proposed Rules]
[Pages 38331-38343]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-13706]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 20

[REG-130975-08]
RIN 1545-BI11


Guidance Under Section 2053 Regarding Deduction for Interest 
Expense and Amounts Paid Under a Personal Guarantee, Certain 
Substantiation Requirements, and Applicability of Present Value 
Concepts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

-----------------------------------------------------------------------

SUMMARY: This document proposes to amend existing regulations issued 
under section 2053 of the Internal Revenue Code (Code). The proposed 
regulations provide guidance on the proper use of present-value 
principles in determining the amount deductible by an estate for 
funeral expenses, administration expenses, and certain claims against 
the estate. In addition, the proposed regulations provide guidance on 
the deductibility of interest expense accruing on tax and penalties 
owed by an estate, and interest expense accruing on certain loan 
obligations incurred by an estate. The proposed regulations also amend 
and clarify the requirements for substantiating the value of a claim 
against an estate that is deductible in certain cases. Finally, the 
proposed regulations provide guidance on the deductibility of amounts 
paid under a decedent's personal guarantee. The proposed regulations 
will affect estates of decedents seeking to deduct funeral expenses, 
administration expenses, and/or certain claims against the estate under 
section 2053. This document also provides a notice of a public hearing 
on these proposed regulations.

DATES: Electronic or written comments must be received by September 26, 
2022. The public hearing is being held by teleconference on October 12, 
2022, at 10 a.m. EST. Requests to speak and outlines of topics to be 
discussed at the public hearing must be received by September 26, 2022. 
If no outlines are received by September 26, 2022, the public hearing 
will be cancelled. Requests to attend the public hearing must be 
received by 5:00 p.m. EST on October 7, 2022. The telephonic hearing 
will be made accessible to people with disabilities. Requests for 
special assistance during the telephonic hearing must be received by 
October 6, 2022.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-130975-
08). Once submitted to the Federal eRulemaking Portal, comments cannot 
be edited or withdrawn. The IRS expects to have limited personnel 
available to process comments that are submitted on paper through the 
mail. The IRS will publish any comments submitted electronically, and 
to the extent practicable, comments submitted on paper to the public 
docket. Send paper submissions to CC:PA:LPD:PR (REG-130975-08), Room 
5205, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044.
    For those requesting to speak during the hearing, send an outline 
of topic submissions electronically via the Federal eRulemaking Portal 
at www.regulations.gov (indicate IRS and REG-130975-08).
    Individuals who want to testify (by telephone) at the public 
hearing must send an email to <a href="/cdn-cgi/l/email-protection#770702151b1e141f1216051e191004371e050459101801"><span class="__cf_email__" data-cfemail="d9a9acbbb5b0bab1bcb8abb0b7beaa99b0abaaf7beb6af">[email protected]</span></a> to receive the 
telephone number and access code for the hearing. The subject line of 
the email must contain the regulation number REG-130975-08 and the word 
TESTIFY. For example, the subject line may say: Request to TESTIFY at 
Hearing for REG-130975-08. The email should include a copy of the 
speaker's public comments and outline of topics. Individuals who want 
to attend (by telephone) the public hearing must also send an email to 
<a href="/cdn-cgi/l/email-protection#bcccc9ded0d5dfd4d9ddced5d2dbcffcd5cecf92dbd3ca"><span class="__cf_email__" data-cfemail="96e6e3f4fafff5fef3f7e4fff8f1e5d6ffe4e5b8f1f9e0">[email protected]</span></a> to receive the telephone number and access code 
for the hearing. The subject line of the email must contain the 
regulation number REG-130975-08 and the word ATTEND. For example, the 
subject line may say: Request to ATTEND Hearing for REG-130975-08. To 
request special assistance during the telephonic hearing, contact the 
Publications and Regulations Branch of the Office of Associate Chief 
Counsel (Procedure and Administration) by sending an email to 
<a href="/cdn-cgi/l/email-protection#304045525c595358555142595e5743705942431e575f46"><span class="__cf_email__" data-cfemail="304045525c595358555142595e5743705942431e575f46">[email protected]</span></a> (preferred) or by telephone at (202) 317-5177 
(not a toll-free number).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Karlene Lesho or Melissa Liquerman at (202) 317-6859; concerning the 
submission of comments, the hearing, or to be placed on the building 
access list to attend the hearing, Regina Johnson at (202) 317-6901 
(not toll-free numbers) or by sending an email to 
<a href="/cdn-cgi/l/email-protection#deaeabbcb2b7bdb6bbbfacb7b0b9ad9eb7acadf0b9b1a8"><span class="__cf_email__" data-cfemail="1b6b6e79777278737e7a6972757c685b726968357c746d">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

I. Overview

    This document contains proposed amendments to the Estate Tax 
Regulations (26 CFR part 20) under section 2053.
    Section 2001(a) imposes a tax on the transfer of the taxable estate 
of every decedent who was at death a citizen or resident of the United 
States. Section 2051 defines the taxable estate as the value of the 
gross estate less the deductions provided for in sections 2053 through 
2058. Section 2031(a) describes the value of the gross estate of the 
decedent as including the value at the time of the decedent's death of 
all property, real or personal, tangible or intangible, wherever 
situated.
    Under section 2053(a), for Federal estate tax purposes, the value 
of the

[[Page 38332]]

taxable estate is determined by deducting from the value of the gross 
estate the following amounts that are allowable by the laws of the 
jurisdiction, whether within or without the United States, under which 
the estate is being administered: (1) funeral expenses, (2) 
administration expenses, (3) claims against the estate, and (4) 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.
    Final regulations amending the regulations under section 2053 (TD 
9468) were published in the Federal Register (74 FR 53652) on October 
20, 2009 (2009 Final Regulations). The 2009 Final Regulations generally 
limit the deduction for claims and expenses to the amount actually paid 
in settlement or satisfaction of that item, with exceptions for certain 
ascertainable amounts, claims against the estate, and indebtedness. See 
Sec.  20.2053-1(d)(1) and (4); Sec.  20.2053-4(b) and (c); and Sec.  
20.2053-7. The 2009 Final Regulations also reserve Sec.  20.2053-
1(d)(6) to provide future guidance on the issue of the appropriate 
application of present-value principles in determining the amount 
deductible under section 2053. These proposed regulations address this 
issue. In addition, these proposed regulations provide or clarify rules 
under section 2053 addressing the deductibility of interest expense 
accruing on tax and penalties owed by an estate, the deductibility of 
interest expense accruing on certain loan obligations incurred by an 
estate, requirements for substantiating the value of a claim against an 
estate that is deductible under Sec.  20.2053-4(b) or (c), and the 
deductibility of amounts paid under a decedent's personal guarantee.

II. Application of Present-Value Principles to Amount Deductible Under 
Section 2053

A. Issue Background

    ``Present value'' is a widely accepted principle of accounting for 
the time value of money. If a payor can defer paying a dollar until a 
later time, the payor can earn income on that dollar until the date of 
payment. The longer a payor can defer payment, the more income the 
payor potentially can earn. Taxpayers, the IRS, and courts regularly 
employ present-value principles for valuation and for other income tax 
and transfer tax purposes. See, e.g., section 1274(b), Sec. Sec.  
1.642(c)-6, 20.7520-1, and 25.2512-5; Simpson et al. v. United States, 
252 U.S. 547 (1920); Commissioner v. Estate of Sternberger, 348 U.S. 
187 (1955).
    The deduction allowable under section 2053 eliminates from taxation 
under section 2001 that portion of the gross estate that the estate 
expends or necessarily will expend in paying certain expenses and 
liabilities of the estate and certain claims against the estate. The 
expended portions of the gross estate do not pass to the decedent's 
legatees, beneficiaries, or heirs and, therefore, are not subject to 
the estate tax. The 2009 Final Regulations implement these principles 
in determining the amount an estate may deduct for certain claims and 
expenses. Section 20.2053-1(d)(1) generally limits the deduction under 
section 2053 for certain claims and expenses to the total amount 
actually paid in settlement or satisfaction of that item. Section 
20.2053-1(d)(2) clarifies that events occurring after the date of a 
decedent's death will be taken into consideration in determining the 
allowable deduction under section 2053.
    Applying present-value principles to determine the allowable 
deduction under section 2053 for payments made or to be made after an 
extended period following a decedent's death is consistent with the 
principles underlying section 2053 and the approach of the 2009 Final 
Regulations. By limiting the deduction to the discounted amount of a 
payment or payments made or to be made after an extended period 
following the decedent's death, the gross estate is reduced by a more 
accurate measure of the amounts not passing to the heirs and legatees. 
Accordingly, the Department of the Treasury (Treasury Department) and 
the IRS have determined that limiting the amount deductible to the 
present value of the amounts paid after an extended post-death period 
will more accurately reflect the economic realities of the transaction, 
the true economic cost of that expense or claim, and the amount not 
passing to the beneficiaries of the estate. Moreover, consistent with 
the 2009 Final Regulations, this approach treats the date of payment of 
the otherwise deductible expense or claim as a post-death event 
properly taken into account under section 2053.
    Rules applying present-value principles to certain long-term 
obligations were provided in proposed regulations (REG-143316-03) 
published in the Federal Register (72 FR 20080) on April 23, 2007 (2007 
Proposed Regulations), which preceded the issuance of the 2009 Final 
Regulations. Specifically, the 2007 Proposed Regulations required the 
computation of the present value of future payments for a decedent's 
noncontingent recurring obligation, such as a noncontingent recurring 
obligation to pay an annuity amount under a property settlement 
agreement. See Sec.  20.2053-4(b)(7)(i) of the 2007 Proposed 
Regulations. However, that rule did not apply to contingent recurring 
obligations. Rather, amounts payable for a decedent's contingent 
recurring obligation became deductible only as amounts were paid by the 
estate in satisfaction of the claim and the amount deductible equaled 
the dollar amount actually paid. No computation of present value 
factored into the amount deductible for such obligations. See Sec.  
20.2053-4(b)(7)(ii) of the 2007 Proposed Regulations.
    The preamble to the 2009 Final Regulations indicated that the 
Treasury Department and the IRS found persuasive criticism of those 
proposed rules by commenters suggesting they produced an inconsistent 
and inequitable result. The 2009 Final Regulations clarified that the 
amount payable pursuant to a decedent's noncontingent recurring 
obligation is deemed ascertainable with reasonable certainty and, 
hence, deductible in advance of payment under the rule in Sec.  
20.2053-1(d)(4), while the amount payable pursuant to a decedent's 
contingent recurring obligation is not ascertainable with reasonable 
certainty and, hence, the amount deductible is limited to amounts 
actually paid by the estate in satisfaction of the claim. See Sec.  
20.2053-4(d)(6). However, the 2009 Final Regulations removed the 
present-value limitation applicable only to noncontingent recurring 
obligations and reserved Sec.  20.2053-1(d)(6) to provide future 
guidance on the issue.
    With regard to a decedent's obligations that satisfy the 
requirements for deductibility as described in the preceding paragraph, 
whether such obligations are recurring or nonrecurring, there is no 
persuasive technical or policy basis for limiting the application of 
present-value principles to payments made or to be made only under 
noncontingent obligations. Because discounting the amounts actually 
paid or to be paid in the future to determine the present value of the 
payments is consistent with the purpose of section 2053 of reducing the 
gross estate only by the amounts not passing to the heirs and legatees, 
these proposed regulations propose to incorporate present-value 
principles in determining the amount deductible under section 2053. The 
proposed regulations will apply present-value principles consistently 
to expenses and claims (whether contingent or noncontingent)

[[Page 38333]]

that are deductible under section 2053. The mechanics of applying 
present-value principles to expenses and claims, including expenses and 
claims that are deductible in advance of payment, are described in 
section II.B of this Background and Explanation of Provisions.

B. Explanation of Provision

    The Treasury Department and the IRS propose to amend the 
regulations under section 2053 to incorporate present-value principles 
in determining the amount deductible under section 2053 for claims and 
expenses (excluding unpaid mortgages and indebtedness deductible under 
Sec.  20.2053-7). The Treasury Department and the IRS recognize, 
however, that estates often cannot pay every deductible claim and 
expense within a short time after the decedent's death and that sound 
tax administration should balance the benefit of more accurately 
determining the amounts not passing to the beneficiaries of an estate 
garnered from applying present-value principles with the administrative 
burden of applying those principles to deductible claims and expenses 
that occur during a reasonable period of administration of the estate. 
The Treasury Department and the IRS understand that a significant 
percentage of estates pay most, if not all, of their ordinary estate 
administration expenses during the three-year period following the 
decedent's date of death. This three-year period takes into account a 
reasonable time for administering and closing the estate. The Treasury 
Department and the IRS note that a reasonably short period of time 
between the decedent's death and the payment of a claim prevents the 
lack of a present-value discount from significantly distorting the 
value of the net (distributable) estate. Applying present-value 
principles in computing the deductible amount of those claims and 
expenses paid more than three years after the decedent's death strikes 
an appropriate balance between benefits and burdens.
    Accordingly, the Treasury Department and the IRS propose to amend 
the regulations under section 2053 to require the discounting to 
present value of certain amounts paid or to be paid in settlement or 
satisfaction of certain claims and expenses in determining the amount 
deductible under section 2053. Specifically, the rule in these proposed 
regulations requires calculating the present value of the amount of a 
deductible claim or expense described in section 2053(a) and Sec.  
20.2053-1(a) that is not paid or to be paid on or before the third 
anniversary of the decedent's date of death, which three-year period 
the proposed regulations define as the ``grace period.'' The proposed 
regulations provide the general formula for calculating the present 
value of such amounts and state that the discount rate to be used in 
the calculation is the applicable Federal rate determined under section 
1274(d) for the month in which the decedent's date of death occurs, 
compounded annually. The length of time from the decedent's death to 
the date of payment or expected date of payment will determine whether 
the Federal rate applicable to that amount is the Federal mid-term rate 
or the Federal long-term rate. The proposed regulations provide that 
any reasonable assumptions or methodology in regard to time period 
measurements may be used in calculating the present value. In addition, 
the proposed regulations require a supporting statement to be filed 
with the Form 706 showing any calculations of present value.
    The proposed regulations explain how to calculate present value 
when the amount of a claim or expense is deductible in advance of the 
payment of such amount, as under Sec. Sec.  20.2053-1(d)(4) and 
20.2053-4(b) and (c). The proposed regulations provide that the 
expected date or dates of payment will be used in computing present 
value and that the expected date or dates of payment will be determined 
by making a fair and reasonable estimate using all information 
reasonably available to the taxpayer. For amounts deductible under 
Sec.  20.2053-4(b) and (c), the proposed regulations provide that the 
expected date or dates of payment must be identified in a written 
appraisal document. Consistent with the rule in Sec.  20.2053-1(d)(2), 
which takes into consideration events occurring during the post-death 
period described in that section, the proposed regulations also provide 
that the computation of present value is subject to adjustment if the 
actual date of payment differs from the estimate used.

III. Deductibility of Interest Expense as Administration Expense

A. Issue Background

    Section 2053(a)(2) allows an estate to deduct from the value of the 
gross estate the amount of administration expenses that are allowable 
by the law of the jurisdiction in which the estate is being 
administered. In some cases, interest expense incurred by an estate may 
be a deductible administration expense under section 2053(a)(2) if the 
facts support a finding that the expense satisfies the requirements of 
section 2053 and the regulations thereunder. Several statutory and 
regulatory provisions are relevant to the deductibility of interest as 
an administration expense under section 2053(a)(2).
    First, effective for decedents dying after December 31, 1997, 
section 2053(c)(1)(D) provides that, ``no deduction shall be allowed 
under [section 2053] for any interest payable under section 6601 on any 
unpaid portion of the [Federal estate tax] for the period during which 
an extension of time for payment of such tax is in effect under section 
6166.''
    Second, Sec.  20.2053-3(a) provides that the amounts deductible 
from a decedent's gross estate as administration expenses under section 
2053(a)(2) are limited to such expenses that actually and necessarily 
are incurred in the administration of the decedent's estate. The 
expenses contemplated in the law are those that are associated with the 
settlement of an estate and the transfer of the property of the estate 
to individual beneficiaries or to a trustee. Expenditures not essential 
to the proper settlement of the estate, but incurred for the individual 
benefit of the heirs, legatees, or devisees, may not be taken as 
deductions.
    Third, Sec.  20.2053-1(b)(2) provides that only expenses that are 
bona fide in nature are deductible under section 2053. Section 20.2053-
1(b)(2) applies to any amounts deductible under section 2053(a) and 
(b), including deductible administration expenses.
    The issue of the extent to which and the circumstances under which 
interest expense satisfies the requirements for a deductible 
administration expense under section 2053(a)(2) and the regulations 
thereunder is longstanding. Over the past half century, a number of 
litigated cases and sub-regulatory published guidance items have 
provided some clarity on the legal issues surrounding the ability to 
deduct, as an administration expense under section 2053(a)(2), interest 
accruing on deferred tax and penalties and on loan obligations incurred 
by an estate. Litigation on this fact-driven issue continues in regard 
to interest accruing on loan obligations incurred by an estate.
    The Treasury Department and the IRS consider it appropriate to 
amend the regulations under section 2053 to address specifically the 
issue of interest expense as a deductible administration expense under 
section 2053(a)(2). In particular, the Treasury Department and the IRS 
propose to address interest expense accruing after the death of the 
decedent on any unpaid portion of tax

[[Page 38334]]

or penalties and on a loan obligation incurred by the estate to pay 
estate taxes or other estate expenses.

B. Explanation of Provisions

1. Interest Accruing on Unpaid Tax and Penalties
    In general, interest is payable at the underpayment rate in section 
6621 on (i) any amount of unpaid Federal tax, and (ii) any unpaid 
additions to tax, additional taxes, and penalties (such interest 
referred to in this preamble as ``section 6601 interest'' and such 
additions to tax, additional taxes, and penalties collectively referred 
to in this preamble as ``penalties''). See section 6601(a) and (e)(2). 
However, interest payable under section 6601 on unpaid estate tax 
deferred under section 6166 (which includes interest accruing on any 
such deferred payment during any period when an extension of time for 
payment is in effect under section 6161(a)(2)(B) with respect to that 
payment) (referred to in this preamble as ``section 6166 interest'') is 
subject to a more favorable interest rate under section 6601(j), and 
section 2053(c)(1)(D) provides that such interest is not deductible. 
The statutory prohibition of a deduction for section 6166 interest does 
not apply to ``non-section 6166 interest,'' defined for purposes of 
this preamble as any section 6601 interest other than section 6166 
interest and interest payable on any unpaid portion of state tax and 
penalties pursuant to state law. Thus, non-section 6166 interest that 
accrues on and after the decedent's date of death may qualify as a 
deductible administration expense under section 2053(a)(2).
    To determine the deductibility of non-section 6166 interest 
accruing on and after the decedent's date of death, the existing 
regulatory requirements in Sec. Sec.  20.2053-1(b)(2) and 20.2053-3(a) 
apply. Non-section 6166 interest satisfies the ``bona fide'' 
requirement in Sec.  20.2053-1(b)(2) because such interest accrues 
pursuant to either Federal or state law. Non-section 6166 interest may 
satisfy the ``actually and necessarily incurred'' requirement in Sec.  
20.2053-3(a), but such determination depends on the facts and 
circumstances.
    Non-section 6166 interest may accrue on and after the date of a 
decedent's death on unpaid estate tax in connection with an extension 
granted under section 6161 (but not under section 6161(a)(2)(B)) or a 
deferral elected under section 6163. A section 6161 extension is 
granted upon a showing of reasonable cause for extending the time for 
payment. A section 6163 deferral is appropriate when the value of a 
reversionary or remainder interest is includible in the gross estate, 
but such value is not immediately available for payment of the estate 
tax. The nature of both section 6161 extensions and section 6163 
deferrals indicates they are based on a demonstrable need to defer 
payment. Accordingly, the Treasury Department and the IRS have 
determined that interest payable under section 6601 on unpaid estate 
tax in connection with an extension under section 6161 or a deferral 
under section 6163 is necessarily incurred in the administration of the 
estate.
    Non-section 6166 interest may accrue on and after the date of a 
decedent's death on unpaid tax and penalties in connection with an 
underpayment of tax or a deficiency (as that term is defined in section 
6211). In many cases, such interest and the underlying underpayment of 
tax or deficiency is attributable to the reasonable exercise of an 
executor's fiduciary duties in administering the estate, as may occur 
in cases involving legitimate disagreements with the IRS, inadvertent 
errors, or reasonable reliance on a qualified professional. The 
Treasury Department and the IRS have determined that, generally, such 
interest is actually and necessarily incurred in the administration of 
the estate. However, the Treasury Department and the IRS are concerned 
that there are some circumstances in which such interest expense would 
not satisfy the ``actually and necessarily incurred'' requirement in 
Sec.  20.2053-3(a). For instance, when non-section 6166 interest 
accrues on unpaid tax and penalties in connection with an underpayment 
of tax or deficiency and the underlying underpayment or deficiency is 
attributable to an executor's negligence, disregard of the rules or 
regulations (including careless, reckless, or intentional disregard of 
rules or regulations) as defined in Sec.  1.6662-3(b)(2), or fraud with 
intent to evade tax, the interest expense is not an expense actually 
and necessarily incurred in the administration of the estate. 
Accordingly, the Treasury Department and the IRS have determined that, 
when interest accrues on any unpaid tax or penalty and the interest 
expense is attributable to an executor's negligence, disregard of the 
rules or regulations, or fraud with intent to evade tax, the interest 
expense is neither actually and necessarily incurred in the 
administration of the estate nor essential to the proper settlement of 
the estate. Further, the Treasury Department and the IRS have 
determined that the rationale underlying this determination applies to 
all non-section 6166 interest, whether the interest accrues in 
connection with a deferral, underpayment, or deficiency.
    The proposed regulations amend the regulations under section 2053 
to confirm that section 6166 interest on estate tax deferred under 
section 6166, including interest accruing on an installment under 
section 6166 during the period of an extension of time for payment 
under section 6161(a)(2)(B), is not a deductible administration expense 
under section 2053. The proposed regulations also provide that non-
section 6166 interest that accrues on or after the decedent's date of 
death on any unpaid tax or penalties may be deductible to the extent 
permitted by Sec. Sec.  20.2053-1 and 20.2053-3(a). The proposed 
regulations further provide that non-section 6166 interest on estate 
tax deferred under section 6161 or section 6163 is actually and 
necessarily incurred in the administration of the estate because the 
grant of the extension was based on a demonstrated need to defer 
payment. Finally, the proposed regulations provide that, in general, 
non-section 6166 interest accruing post-death on any unpaid tax or 
penalties in connection with an underpayment of tax or a deficiency is 
actually and necessarily incurred in the administration of the estate. 
However, the proposed regulations provide that, notwithstanding these 
rules, non-section 6166 interest accruing on unpaid tax and penalties 
on and after the decedent's date of death, whether in connection with a 
deferral, underpayment, or deficiency, is not actually and necessarily 
incurred in the administration of the estate and is not deductible to 
the extent the interest expense is attributable to an executor's 
negligence, disregard of applicable rules or regulations (including 
careless, reckless, or intentional disregard of rules or regulations) 
as defined in Sec.  1.6662-3(b)(2), or fraud with intent to evade tax. 
Interest expense is attributable to an executor's negligence, disregard 
of applicable rules or regulations, or fraud with intent to evade tax 
to the extent that the underlying underpayment, deficiency, or penalty 
is attributable to such conduct by the executor. Similarly, even when 
the underlying underpayment, deficiency, or penalty is not attributable 
to such conduct by the executor, interest expense is attributable to an 
executor's negligence, disregard of applicable rules or regulations, or 
fraud with intent to evade tax to the extent the subsequent

[[Page 38335]]

accrual of interest is attributable to such conduct by the executor.
    The rules in the proposed regulations pertaining to whether non-
section 6166 interest satisfies the requirement in Sec.  20.2053-3(a) 
supplant the rule reflected in Rev. Rul. 79-252, 1979-2 C.B. 333, and 
in the second holding of Rev. Rul. 81-154, 1981-1 C.B. 470. (See Sec.  
601.601(d)(2)(ii)(b).) Together, these two holdings create an implicit 
presumption that interest accruing on any unpaid portion of tax or 
penalties in all cases satisfies the requirements for a deductible 
administration expense, which is inconsistent with the requirement in 
Sec.  20.2053-3(a) that the expense be actually and necessarily 
incurred in the administration of the estate.
2. Interest Accruing on Certain Loan Obligations Incurred by an Estate
    The same requirements that apply for deductible interest accruing 
on unpaid tax and penalties also apply for deductible interest accruing 
on loan obligations incurred by an estate. Interest accruing on a loan 
obligation incurred by an estate satisfies the ``bona fide'' 
requirement in Sec.  20.2053-1(b)(2) when both the interest expense and 
the loan underlying the interest expense are bona fide in nature and do 
not constitute a transfer that is essentially donative in character. 
Such interest satisfies the ``actually and necessarily incurred'' 
requirement in Sec.  20.2053-3(a) when the loan on which the interest 
expense accrues and its terms are necessary to the administration of 
the decedent's estate and are essential to the proper settlement of the 
decedent's estate.
    Among the reasons an estate might enter into a loan arrangement is 
to facilitate the payment of the estate's taxes and other liabilities 
or the administration of the estate. Some estates face genuine 
liquidity issues that make it necessary to find a means to satisfy 
their liabilities, and incurring a loan obligation on which interest 
accrues may be the only or best way to obtain the necessary liquid 
funds. However, if illiquidity has been created intentionally (whether 
in the estate planning, or by the estate with knowledge or reason to 
know of the estate tax liability) prior to the creation of the loan 
obligation to pay estate expenses and liabilities, the underlying loan 
may be bona fide in nature but most likely will not be found to be 
actually and necessarily incurred in the administration of the estate.
    The issue of the deductibility of interest expense accruing on a 
loan obligation incurred by an estate has been litigated often, with 
varying results. See, e.g., Estate of Black v. Commissioner, 133 T.C. 
340 (2009); Estate of Graegin v. Commissioner, T.C. Memo. 1988-477. In 
order to provide guidance on the deductibility of interest accruing on 
a loan obligation entered into by the decedent's estate to facilitate 
the payment of the estate's taxes and other liabilities or the 
administration of the estate, the Treasury Department and the IRS 
propose to amend the regulations under section 2053. The proposed 
regulations provide that interest expense is deductible only if: (i) 
the interest accrues pursuant to an instrument or contractual 
arrangement that constitutes indebtedness under applicable income tax 
regulations and general principles of Federal tax law; (ii) both the 
interest expense and the loan on which interest expense accrues satisfy 
the requirement of Sec.  20.2053-1(b)(2) that they are bona fide in 
nature; and (iii) the loan on which interest accrues and the loan's 
terms are actually and necessarily incurred in the administration of 
the decedent's estate and are essential to the proper settlement of the 
decedent's estate (within the meaning of Sec.  20.2053-3(a)).
    Finally, the proposed regulations include a nonexclusive list of 
factors to consider in determining whether interest expense payable 
pursuant to such a loan obligation of an estate satisfies the 
requirements of Sec. Sec.  20.2053-1(b)(2) and 20.2053-3(a). In 
general, the factors suggest that interest accruing on a loan 
obligation may satisfy these requirements when the loan and its 
underlying terms are reasonable and comparable to an arms-length loan 
transaction and correspond to the estate's ability to satisfy the loan, 
and the loan obligation is entered into by the executor with a lender 
who is not a substantial beneficiary of the decedent's estate (or an 
entity controlled by such a beneficiary) at a time when there is no 
viable alternative to obtain the necessary liquid funds to satisfy 
estate liabilities. In addition to providing guidance on when interest 
accruing on a loan obligation may satisfy the requirements of 
Sec. Sec.  20.2053-1(b)(2) and 20.2053-3(a), the list of factors may 
suggest when the opposite is true and interest accruing on a loan 
obligation does not satisfy these requirements. For instance, if, taken 
in their entirety, the facts and circumstances indicate that either the 
need for the loan or any of the loan terms are contrived to generate, 
or increase the amount of, a deduction for the interest expense, the 
interest is not deductible. Thus, if the lender is a primary 
beneficiary of the estate (or an entity controlled by such beneficiary) 
who may have liability for payment of the estate tax or whose share of 
the estate may bear the burden of estate taxes and other liabilities, 
the facts indicate the loan is not necessarily incurred in the 
administration of the estate and, therefore, indicate that any interest 
accruing on the loan is not necessarily incurred in the administration 
of the estate. Further, if the loan obligation carries an extended loan 
term with a single balloon payment that does not correspond with the 
estate's ability to satisfy the loan, the facts indicate that the 
interest accruing on the loan is not necessarily incurred in the 
administration of the estate.

IV. Substantiation Requirements for Valuations Performed Pursuant to 
Sec.  20.2053-4(b) and (c)

A. Issue Background

    Section 20.2053-4(b) and (c) provides exceptions to the general 
rule in Sec.  20.2053-4(a) that an estate may deduct only amounts that 
actually are paid by the estate in satisfaction of a claim. Section 
20.2053-4(b) generally allows a deduction for the value of claims and 
counterclaims in a related matter, and Sec.  20.2053-4(c) allows a 
deduction for the value of unpaid claims totaling not more than 
$500,000. In each case, certain requirements must be satisfied to 
enable the estate to use these exceptions.
    One such requirement is that the value of a claim against the 
estate that may be deducted under either Sec.  20.2053-4(b) or (c) must 
be determined from a ``qualified appraisal'' performed by a ``qualified 
appraiser'' within the meaning of section 170 and the regulations 
thereunder. The Treasury Department and the IRS have reconsidered this 
requirement. The definition of ``qualified appraiser'' and ``qualified 
appraisal'' in the regulations under section 170 were drafted in the 
context of appraising an asset being donated, and not a liability such 
as a claim against an estate. Certain of the elements of a qualified 
appraisal, including references to the ``date of contribution,'' and 
the requirements necessary to meet the definition of a ``qualified 
appraiser,'' do not apply in the context of valuing a claim against an 
estate for purposes of determining the value to be deducted from the 
gross estate under section 2053.
    The Treasury Department and the IRS have determined that the rule 
in Sec.  20.2053-4(b) and (c) should be amended to remove the 
requirement that the value be determined by a ``qualified appraisal'' 
performed by a

[[Page 38336]]

``qualified appraiser'' within the meaning of section 170 and the 
regulations thereunder. Instead, the Treasury Department and the IRS 
propose to amend the regulations under section 2053 to provide revised 
rules for valuing claims for purposes of Sec.  20.2053-4(b) and (c).

B. Explanation of Provision

    The Treasury Department and the IRS propose to amend the 
regulations under section 2053 to remove the requirement in Sec.  
20.2053-4(b)(1)(iv) and (c)(1)(iv) that valuations of the claims 
deductible under Sec.  20.2053-4(b) and (c) must be supported by a 
``qualified appraisal'' performed by a ``qualified appraiser.'' For 
purposes of determining the allowable deduction under Sec.  20.2053-
4(b) and (c), these proposed regulations instead provide new 
requirements intended to facilitate the appropriate valuation of these 
claims.
    Specifically, to determine the current value of a claim deductible 
under Sec.  20.2053-4(b) or (c), the proposed regulations require a 
written appraisal that adequately reflects the current value of the 
claim when the Form 706 is being completed. The current value of the 
claim should take into account post-death events occurring prior to the 
time a deduction is claimed as well as those events reasonably 
anticipated to occur. In addition, the proposed regulations require the 
written appraisal to consider all relevant facts and elements of value 
that are known or that can be reasonably anticipated at the time of the 
appraisal. The written appraisal must be prepared, signed, and dated by 
a person who is qualified to appraise the claim being valued, but who 
is not (i) a family member of the decedent, a related entity as to the 
decedent, or a beneficiary of the decedent's estate or revocable trust 
(as those terms are defined in Sec.  20.2053-1(b)(2)(iii)), (ii) a 
family member of a beneficiary or a related entity as to a beneficiary 
(as those terms would be defined in Sec.  20.2053-1(b)(2)(iii) if 
references therein to the decedent were replaced with a reference to 
such beneficiary, and without the limitations based on the decedent's 
date of death), or (iii) an employee or other owner of any of them. The 
appraisal also must include a statement describing the basis for the 
person's qualification to appraise the claim being valued.

V. Deductibility of Amounts Paid Pursuant to Decedent's Personal 
Guarantee

A. Issue Background

    A commenter responding to the 2007 Proposed Regulations suggested 
that the final regulations confirm that payments made pursuant to a 
decedent's personal guarantee existing at the decedent's death are 
deductible in the same manner as payments made in satisfaction of any 
other deductible claim against a decedent's estate.
    For payments made pursuant to a decedent's obligation as a 
guarantor of indebtedness to be deductible, the claim must represent a 
personal obligation of the decedent existing at the time of the 
decedent's death, and the claim must be enforceable against the 
decedent's estate. See Sec.  20.2053-4(a)(1). However, not all 
enforceable debts are deductible under section 2053. A claim founded 
upon a decedent's guarantee is considered a claim founded upon a 
promise or agreement. Accordingly, the deduction for such a claim is 
limited to the extent that the guarantee was contracted bona fide and 
in exchange ``for an adequate and full consideration in money or 
money's worth.'' See section 2053(c)(1)(A) and Sec.  20.2053-4(d)(5). 
For a claim founded upon a decedent's guarantee to satisfy the 
``adequate and full consideration in money or money's worth'' 
requirement and, therefore, be deductible under section 2053, the 
decedent must have received a benefit reducible to money value in 
exchange for the decedent's guarantee. See United States v. Stapf, 375 
U.S. 118, 131 (1963) (``Absent such an . . . augmentation of the 
estate, a testator could disguise transfers as payments in settlement 
of debts and claims and thus obtain deductions for transmitting 
gifts.''); Commissioner v. Wemyss, 324 U.S. 303 (1945) (construing the 
requirement of ``adequate and full consideration in money or money's 
worth'' in the gift tax context to require a benefit to the donor 
reducible to money value ``to relieve a transfer by him from being a 
gift.''); Estate of Theis v. Commissioner, 81 T.C. 741, 745, 748 (1983) 
(noting the amounts at issue must have been contracted bona fide and 
for full and adequate consideration), aff'd 770 F.2d 981 (11th Cir. 
1985).
    Guarantor agreements often are required in the context of a loan to 
the guarantor's closely-held business. In these cases, the guarantor 
may be motivated to enter into the guarantee agreement to preserve the 
value of the guarantor's interest in the business. The Treasury 
Department and the IRS have determined that it is appropriate to 
provide guidance on whether, for purposes of section 2053, a guarantor 
agreement is contracted for an adequate and full consideration in money 
or money's worth in such a situation for purposes of section 2053.
    When payments pursuant to a decedent's guarantee satisfy the 
requirements for a deductible claim, the amount deductible is limited 
to the portion of the total claim due from and actually paid by the 
estate, but reduced by the amount recovered, or the amount that could 
have been recovered, from another party, insurance, or otherwise. See 
Sec. Sec.  20.2053-1(d)(1) and (3) and 20.2053-4(d)(3). Further, to 
avoid the double-counting of a debt that occurs when the debt both is 
taken into account in computing the gross estate and is taken as a 
section 2053 deduction, payments made pursuant to the decedent's 
guarantee are deductible only to the extent that the debt for which the 
guarantee is given has not been taken into account in computing the 
value of an asset includible in the decedent's gross estate.
    A regulatory provision specifically addressing the deductibility of 
claims founded upon a decedent's guarantee will assist taxpayers in 
understanding and meeting their tax responsibilities and will result in 
consistent treatment for similarly situated taxpayers.

B. Explanation of Provision

    The proposed regulations provide that a claim founded upon the 
decedent's agreement to personally guarantee a debt of another is a 
claim founded on a promise and, accordingly, must satisfy the 
applicable requirements in section 2053(c)(1)(A) and Sec.  20.2053-
4(d)(5). Specifically, the guarantee must have been bona fide and in 
exchange for adequate and full consideration in money or money's worth. 
The proposed regulations confirm that the bona fide nature of a claim 
related to the guarantee of a debt of a family member, a related 
entity, or a beneficiary will be determined with reference to Sec.  
20.2053-1(b)(2)(ii). The proposed regulations provide a bright line 
rule that a decedent's agreement to guarantee a bona fide debt of an 
entity in which the decedent had control (within the meaning of section 
2701(b)(2)) at the time of the guarantee satisfies the requirement that 
the agreement be in exchange for adequate and full consideration in 
money or money's worth. Alternatively, the proposed regulations provide 
that this requirement also is satisfied if, at the time the guarantee 
is given, the maximum liability of the decedent under the guarantee did 
not exceed the fair market value of the decedent's interest in the 
entity. Finally, the proposed regulations provide that the estate's 
right of contribution or reimbursement will reduce the amount

[[Page 38337]]

deductible in accordance with Sec.  20.2053-1(d)(3).

Proposed Applicability Date

    The regulations are proposed to apply to the estate of each 
decedent dying on or after the date of publication in the Federal 
Register of a Treasury decision adopting these rules as final 
regulations.

Effect on Other Documents

    Rev. Rul. 79-252 (1979-2 C.B. 333) states that interest on a 
Federal estate tax deficiency is a necessary administration expense 
under section 2053(a)(2) and is deductible to the extent allowable 
under local law. Rev. Rul. 81-154 (1981-1 C.B. 470) states, in the 
second holding, that interest incurred because of a late payment of tax 
is deductible under section 2053(a)(2) to the extent it is allowable 
under local law. Rev. Rul. 79-252 will be obsoleted and Rev. Rul. 81-
154 will be modified, effective as of the date that a Treasury decision 
adopting these rules as final regulations is published in the Federal 
Register.

Statement of Availability of IRS Documents

    IRS revenue procedures, revenue rulings, notices, and other 
guidance cited in this document are published in the Internal Revenue 
Bulletin (or Cumulative Bulletin) and are available from the 
Superintendent of Documents, U.S. Government Publishing Office, 
Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.

Special Analyses

Regulatory Planning and Review

    This regulation is not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Treasury Department and the Office of Management 
and Budget regarding review of tax regulations. Therefore, a regulatory 
impact assessment is not required.

Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it 
is hereby certified that these regulations will not have a significant 
economic impact on a substantial number of small entities. This 
certification is based on the fact that these regulations primarily 
affect estates of a decedent which generally are not small entities 
under the Act. Accordingly, these regulations are not expected to have 
a significant economic impact on a substantial number of small 
entities, and a regulatory flexibility analysis is not required.
    Pursuant to section 7805(f) of the Code, these proposed regulations 
will be submitted to the Chief Counsel for the Office of Advocacy of 
the Small Business Administration for comment on their impact on small 
businesses.

Paperwork Reduction Act

    The collections of information contained in this notice of proposed 
rulemaking have been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)), under Form 706, United States Estate (and Generation-
Skipping Transfer) Tax Return, and assigned control number 1545-0015. 
Comments on the collection of information should be sent to the Office 
of Management and Budget, Attn: Desk Officer for the Department of the 
Treasury, Office of Information and Regulatory Affairs, Washington, DC 
20503, and to Clearance Officer, SE:CAR:MP:T:T:SP, Washington, DC 
20224. Comments on the collection of information should be received by 
August 29, 2022. Comments are specifically requested concerning:
    Whether the proposed collections of information are necessary for 
the proper performance of the functions of the IRS, including whether 
the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collections of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs of operation, maintenance, 
and purchase of services to provide information.
    The collections of information in these proposed regulations are in 
proposed Sec. Sec.  20.2053-1(d)(6)(iv) and 20.2053-4(b)(1)(iv) and 
(c)(1)(iv). The information requested in Sec.  20.2053-1(d)(6)(iv) is 
necessary in order to evaluate whether an estate is entitled to a 
deduction in the amount claimed on Form 706. The collection of 
information is mandatory to obtain a benefit. The information requested 
in Sec.  20.2053-4(b)(1)(iv) and (c)(1)(iv) is necessary in order to 
evaluate whether an estate is entitled to a deduction claimed on Form 
706 and, if so, the amount of the deduction. The collection of 
information is mandatory to obtain a benefit. The likely respondents 
are estates of decedents seeking to deduct on Form 706 funeral 
expenses, administration expenses, and/or certain claims against the 
estate under section 2053.
    Estimated total annual reporting burden: 23,661 hours.
    Estimated average annual burden per respondent: 3 hours.
    Estimated number of respondents: 7,887.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number assigned by the Office of 
Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
state, local, or tribal government, in the aggregate, or by the private 
sector, of $100 million (updated annually for inflation). This proposed 
rule does not include any Federal mandate that may result in 
expenditures by state, local, or tribal governments, or by the private 
sector in excess of that threshold.

Executive Order 13132: Federalism

    E.O. 13132, titled ``Federalism,'' prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on state and local 
governments, and is not required by statute, or preempts state law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the E.O. This proposed rule does not have federalism 
implications and does not impose substantial direct compliance costs on 
state and local governments or preempt state law within the meaning of 
the E.O.

Drafting Information

    The principal authors of these regulations are Karlene Lesho and 
Melissa Liquerman, Office of the Associate Chief Counsel (Passthroughs 
and Special Industries). However, other personnel from the Treasury 
Department and the IRS participated in their development.

[[Page 38338]]

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES section. 
The Treasury Department and the IRS request comments on all aspects of 
the proposed regulations.
    Any electronic comments submitted, and to the extent practicable, 
any paper comments submitted, will be made available at 
www.regulations.gov or upon request.
    A public hearing is being held by teleconference on October 12, 
2022, at 10:00 a.m. EST unless no outlines are received by September 
26, 2022.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to comment by telephone at the hearing must submit electronic or 
written comments and an outline of the topics to be discussed and the 
time to be devoted to each topic by September 26, 2022 as prescribed in 
the preamble under the ADDRESSES section. A period of ten minutes will 
be allotted to each person for making comments (although this rule may 
be waived in unusual circumstances or for good cause shown). After the 
deadline for receiving outlines has passed, the IRS will prepare an 
agenda containing the schedule of speakers. Copies of the agenda will 
be made available at www.regulations.gov, search IRS and REG-130975-08. 
Copies of the agenda will also be available by emailing a request to 
<a href="/cdn-cgi/l/email-protection#b3c3c6d1dfdad0dbd6d2c1daddd4c0f3dac1c09dd4dcc5"><span class="__cf_email__" data-cfemail="afdfdacdc3c6ccc7caceddc6c1c8dcefc6dddc81c8c0d9">[email protected]</span></a>. Please put ``REG-130975-08 Agenda Request'' in 
the subject line of the email.
    Announcement 2020-4, 2020-17 IRB 667 (April 20, 2020), provides 
that until further notice, public hearings conducted by the IRS will be 
held telephonically. Any telephonic hearing will be made accessible to 
people with disabilities.

List of Subjects in 26 CFR Part 20

    Estate taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, the IRS proposes to amend 26 CFR part 20 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 20.2053-1 is amended by:
0
1. Adding paragraph (d)(6).
0
2. Revising the introductory text of paragraph (d)(7).
0
3. In paragraph (d)(7), Examples 1 through 3 are designated as 
paragraphs (d)(7)(i) through (iii), respectively.
0
4. In newly designated paragraphs (d)(7)(i) and (ii):
0
i. Removing ``ascertainable,'' and adding ``ascertainable.'' in its 
place.
0
ii. Adding a sentence to the end of the paragraphs.
0
5. In newly designated paragraph (d)(7)(iii):
0
i. Removing ``deduction,'' and ``Example 2'' and adding ``deduction.'' 
and ``paragraph (d)(7)(ii) of this section (Example 2)'' in their 
places, respectively.
0
ii. Revising the last sentence of the paragraph.
0
6. Adding paragraphs (d)(7)(iv) through (vi).
0
7. Revising paragraph (f).
    The additions and revisions read as follows:


Sec.  20.2053-1  Deductions for expenses, indebtedness, and taxes; in 
general.

* * * * *
    (d) * * *
    (6) Limitation on amount deductible--(i) Claims and expenses paid 
after the grace period--(A) Definitions. The following definitions 
apply for purposes of this paragraph (d):
    (1) Grace period. The grace period is the period beginning on the 
date of the decedent's death and extending through the third 
anniversary of that date.
    (2) Post-grace-period payment. A post-grace-period payment is the 
amount of a claim or expense described in paragraph (a) of this section 
not paid or to be paid before the end of the grace period.
    (B) General rule. To the extent that a post-grace-period payment 
otherwise meets the requirements for deductibility of a claim or 
expense under section 2053 and the regulations in this part thereunder, 
the amount deductible under section 2053 is limited to the present 
value, as of the decedent's date of death, of that amount. The present 
value of each post-grace-period payment is calculated by discounting it 
from the payment date or expected date of payment to the decedent's 
date of death. The applicable discount rate is the applicable Federal 
rate determined under section 1274(d) for the month in which the 
decedent's death occurs, compounded annually. The length of time from 
the decedent's date of death to the date of payment or expected date of 
payment will determine whether the Federal rate applicable to that 
payment is the Federal mid-term rate or the Federal long-term rate. The 
Internal Revenue Service publishes the applicable Federal rates for 
each month in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2)(ii) of this chapter). Any reasonable assumptions and 
methodology in regard to time period measurements may be used to 
calculate, in accordance with paragraph (d)(6)(ii) of this section, the 
present value of the post-grace-period payment(s).
    (ii) Calculating present value of amounts paid or payable--(A) 
Single post-grace-period payment. The amount deductible under section 
2053 for a single post-grace-period payment is computed by calculating 
the present value of such payment as follows:

Amount of future payment x [1 / (1 + i)]t

Where:

t is the amount of time (expressed in years and fractions of years) 
from the day after the decedent's date of death to the payment date 
or expected date of payment; and
 i is the applicable discount rate.

    (B) Multiple post-grace-period payments. The amount deductible 
under section 2053 for multiple post-grace-period payments is computed 
by calculating the present value of each such payment using the formula 
in paragraph (d)(6)(ii)(A) of this section; the sum of the discounted 
amounts of the post-grace-period payments is the amount that is 
deductible for such payments.
    (C) Multiple payment dates occurring during and after the grace 
period. A claim or expense described in paragraph (a) of this section 
may have at least one payment date or expected date of payment during 
the grace period and at least one payment date or expected date of 
payment after the grace period. For such a claim or expense, the amount 
deductible under section 2053 is computed by calculating the present 
value of each separate post-grace-period payment using the formula in 
paragraph (d)(6)(ii)(A) of this section, and adding the total of these 
discounted amounts to any amount of the claim or expense having a 
payment date or expected date of payment during the grace period. Any 
amount having a payment date or expected date of payment during the 
grace period is not discounted in arriving at the amount deductible.
    (iii) Discounting when actual date of payment is unknown. With 
regard to a post-grace-period payment that may be deducted in advance 
of payment under paragraph (d)(4) of this section or Sec.  20.2053-4(b) 
or (c), the amount

[[Page 38339]]

deductible must be determined by computing the present value of the 
amount of that post-grace-period payment as if that amount will be paid 
on the expected date of payment. The expected date of payment in 
settlement or satisfaction of a claim or expense must be determined 
using all information reasonably available to the taxpayer to make a 
fair and reasonable estimate of the expected date or dates of payment. 
For amounts deductible under Sec.  20.2053-4(b) or (c), the expected 
date or dates of payment must be identified in a written appraisal 
document of a person that is qualified by knowledge and experience to 
appraise the claim being valued. See Sec.  20.2053-4(b)(1)(iv) and 
(c)(1)(iv). However, the computation of present value is subject to 
adjustment if, within the period described in paragraph (d)(2) of this 
section, the actual date or dates of payment become known and differ 
from the estimated date or dates of payment. See paragraph (d)(6)(vi) 
of this section.
    (iv) Statement supporting present value computation required. A 
deduction under section 2053 for a claim or expense that is required to 
be discounted to present value under paragraph (d)(6)(i) of this 
section must be supported by a statement to be filed with the Form 706 
showing the computation of the present value of that item, including, 
if applicable, the basis for the determination of the expected date(s) 
of payment.
    (v) Ordering rule. In computing the amount deductible for a claim 
or expense under paragraph (d) of this section, the amount deductible 
for a claim or expense (otherwise determined under paragraphs (d)(1) 
through (4) of this section) is discounted to present value under 
paragraph (d)(6) of this section before applying the limits in Sec.  
20.2053-4(b)(2) and (c).
    (vi) Effect of post-death events. If a deduction is claimed for the 
present value of a post-grace-period payment, the claimed deduction is 
subject to adjustment to reflect any post-death events affecting the 
amount of such post-grace-period payment and any change in the expected 
or actual date of payment. See paragraph (d)(2) of this section for the 
period during which post-death events are taken into account.
    (vii) Exceptions. The rule in paragraph (d)(6)(i) of this section 
does not apply to unpaid principal of mortgages and other indebtedness 
deductible under Sec.  20.2053-7.
    (7) Examples. Assume that the amounts described in section 2053(a) 
are payable out of property subject to claims and are allowable by the 
law of the jurisdiction governing the administration of the estate, 
whether the applicable jurisdiction is within or outside of the United 
States. Assume that, unless otherwise provided, the claims against the 
estate are not deductible under Sec.  20.2053-4(b) or (c) and all 
amounts are paid during the grace period. The following examples 
illustrate the application of this paragraph (d):
    (i) * * * However, any amounts that will not be paid on or before 
the third anniversary of the date of D's death (that is, are not paid 
during the grace period) are subject to the present value limitation in 
paragraph (d)(6) of this section.
    (ii) * * * If the amount of the claim will not be paid on or before 
the third anniversary of the date of D's death (that is, the amount is 
not paid during the grace period), the amount deductible is subject to 
the present value limitation in paragraph (d)(6) of this section.
    (iii) * * * At that time, a deduction will be allowed for the 
amount that is either paid or meets the requirements of paragraph 
(d)(4) of this section for deducting certain ascertainable amounts, 
subject to the present value limitation in paragraph (d)(6) of this 
section, if applicable.
    (iv) Example 4: Discounting amount paid more than three years after 
decedent's date of death. The facts are the same as in paragraph 
(d)(7)(ii) of this section (Example 2) except that E files a timely 
protective claim for refund in accordance with paragraph (d)(5) of this 
section to preserve the estate's right to claim a refund, a final 
judgment in the amount of $100x is entered against and paid by the 
estate precisely five years after D's date of death, and the applicable 
Federal (mid-term) rate determined under section 1274(d) for the month 
in which D's date of death occurs, compounded annually, is 2.00%. 
Within a reasonable period of time after the final judgment is entered, 
E notifies the Commissioner that the contingency has been resolved. E 
may claim a deduction for the present value of the amount paid in 
satisfaction of the claim as of D's date of death. Under the facts in 
this paragraph (d)(7)(iv), the present value of the amount paid in five 
years equals $100x/(1 + .0200)\5\ or $100x/1.104081 or $90.57x.
    (v) Example 5: Discounting amount to be paid when actual date of 
payment not known. The facts are the same as in paragraph (d)(7)(ii) of 
this section (Example 2) except that the claim is deductible under 
Sec.  20.2053-4(c) because all amounts deducted by the estate under 
that paragraph do not exceed $500,000. E obtains a written appraisal 
document meeting the requirements of Sec.  20.2053-4(c)(iv) and 
reasonably determines that the future value of the claim is $300,000 
(that is, before discounting the claim to its present value). E 
determines, after considering all available information and making 
reasonable assumptions, that the expected date of payment of the claim 
is Date X, which is reflected in the appraisal. Date X is a date after 
the third anniversary of D's date of death. E may claim a deduction for 
the present value of the claim as of D's date of death, determined by 
discounting $300,000 for the period from the date of death to Date X, 
using the applicable Federal rate determined under section 1274(d) for 
the month in which D's death occurs, compounded annually.
    (vi) Example 6: Discounting amount to be paid for series of 
payments payable over a period that does not end on or before the third 
anniversary of the decedent's death. Pursuant to the terms of a divorce 
and separation agreement entered on June 1 of Year 1, Decedent (D) is 
obligated to make annual payments of $100x to Claimant (C) on September 
1 of year 1 and each September 1st thereafter until D has made a total 
of 10 such payments. D dies on December 1 of Year 5 after having made 
the first five annual payments required under the agreement. The 
applicable Federal (mid-term) rate determined under section 1274(d) for 
the month in which D's death occurs, compounded annually, is 2.00%. The 
executor of D's estate (E) may claim a deduction with respect to C's 
claim on D's Form 706 under the special rule contained in paragraph 
(d)(4) of this section because the deductible amount can be ascertained 
with reasonable certainty. E computes the discounted deductible amount 
of the claim by adding the undiscounted amount of the three payments 
that will be made before the third anniversary of D's death ($300x) to 
the discounted amounts of the two payments that will be made after the 
third anniversary of D's death. Accordingly, the amount deductible for 
the claim equals $483.866x ($300x + $92.843x + $91.023x). The 
individual calculations for the present values of the payments in the 
last two years of the payment obligation are shown in table 1 to this 
paragraph (d)(7)(vi).

[[Page 38340]]



                                         Table 1 to Paragraph (d)(7)(vi)
----------------------------------------------------------------------------------------------------------------
                                    (1)             (2)             (3)             (4)               (5)
                             -----------------------------------------------------------------------------------
                                                                                               [1/(1 + i)]\t\ x
                                     t             1 + i         1/(1 + i)    [1/(1 + i)]\t\         100x
----------------------------------------------------------------------------------------------------------------
Year 9......................            3.75          1.0200        0.980392        0.928430             92.843x
Year 10.....................            4.75          1.0200        0.980392        0.910226             91.023x
----------------------------------------------------------------------------------------------------------------

* * * * *
    (f) Applicability date. The rules of this section apply to the 
estates of decedents dying on or after [date of publication of the 
final rule in the Federal Register].
0
Par. 3. Section 20.2053-3 is amended by:
0
1. Redesignating paragraphs (d) and (e) as paragraphs (e) and (f), 
respectively.
0
2. Adding a new paragraph (d).
0
3. Revising newly redesignated paragraph (f).
    The addition and revision read as follows:


Sec.  20.2053-3  Deduction for expenses of administering estate.

* * * * *
    (d) Interest expense incurred in administering the estate--(1) 
Interest payable under section 6601 on unpaid tax--(i) Section 6166 
interest. As used in paragraph (d)(1) of this section, the phrase 
``section 6166 interest'' means interest payable under section 6601 on 
unpaid estate tax deferred under section 6166. This includes interest 
accruing on an installment or other payment under section 6166 during 
the period of an extension of time for making that payment under 
section 6161(a)(2)(B). Section 6166 interest is not deductible pursuant 
to section 2053(c)(1)(D).
    (ii) Non-section 6166 interest. As used in paragraph (d)(1) of this 
section, the phrase ``non-section 6166 interest'' means interest 
payable under section 6601 or under state or local law other than 
section 6166 interest. Non-section 6166 interest that accrues on or 
after the decedent's date of death on any unpaid tax or penalties may 
be deductible to the extent permitted by Sec.  20.2053-1 and this 
section. For purposes of paragraph (d)(1) of this section, penalties 
include any unpaid additions to tax, additional taxes, and penalties. 
When non-section 6166 interest accrues on unpaid estate tax deferred 
under section 6161 or section 6163, the interest expense is actually 
and necessarily incurred in the administration of the estate for 
purposes of paragraph (a) of this section because the extension was 
based on a demonstrated need to defer payment. When non-section 6166 
interest accrues on and after the date of a decedent's death on any 
unpaid tax or penalties in connection with an underpayment of tax or a 
deficiency, the interest expense generally is actually and necessarily 
incurred in the administration of the estate for purposes of paragraph 
(a) of this section.
    (iii) Exception. Notwithstanding paragraph (d)(1)(ii) of this 
section, non-section 6166 interest accruing on unpaid tax and penalties 
on and after the decedent's date of death, whether in connection with a 
deferral, underpayment, or deficiency, is not actually and necessarily 
incurred in the administration of the estate for purposes of paragraph 
(a) of this section and is not deductible to the extent the interest 
expense is attributable to an executor's negligence, disregard of 
applicable rules or regulations (including careless, reckless, or 
intentional disregard of rules or regulations) as defined in Sec.  
1.6662-3(b)(2) of this chapter, or fraud with intent to evade tax. 
Interest expense is attributable to an executor's negligence, disregard 
of applicable rules or regulations, or fraud with intent to evade tax 
to the extent that the underlying deferral, underpayment, or 
deficiency, is attributable to such conduct by the executor. Similarly, 
even when the underlying deferral, underpayment, or deficiency is not 
attributable to such conduct by the executor, the interest expense is 
attributable to an executor's negligence, disregard of the rules or 
regulations, or fraud with intent to evade tax to the extent the 
subsequent accrual of interest is attributable to such conduct by the 
executor.
    (iv) Examples. The following examples illustrate the application of 
this paragraph (d)(1). In each example, the decedent (D) dies on 
October 1, Year 1, and the estate tax return is due July 1 of the 
following calendar year, Year 2. In each example, except as expressly 
stated, there is no negligence, disregard of applicable rules or 
regulations, or fraud on the part of the executor.
    (A) Example 1. On July 1, Year 2, the executor of D's estate (E) 
timely files the estate tax return based on values determined in good 
faith and pays $500,000, which is the estate tax shown on the return. 
Upon examination, the Internal Revenue Service (IRS) makes an 
adjustment to the value of an asset includible in the gross estate, 
resulting in a $25,000 increase in estate tax due. E initially contests 
the adjustment, but eventually agrees to the assessment of the 
deficiency in the amount of $25,000. Interest on the deficiency is 
payable under section 6601 in the amount of $X. E makes a payment in 
satisfaction of the assessed deficiency and interest. For purposes of 
paragraph (a) of this section, the interest expense in the amount of $X 
is considered actually and necessarily incurred in the administration 
of D's estate, and its deduction reduces the amount of the deficiency.
    (B) Example 2. The executor of D's estate (E) files the estate tax 
return and pays the estate tax shown on the return ($500,000) on July 1 
of Year 3, one year after the due date. On August 1, Year 3, the IRS 
assesses interest on the unpaid tax under section 6601 in the amount of 
$X, assesses late filing and late payment penalties in accordance with 
section 6651 in the amount of $Y, and issues a notice and demand for 
payment of $X and $Y. On August 1, Year 4, E makes payment to the IRS 
of $Z, which is the total amount due for $X and $Y, as well as interest 
that accrued on these amounts from August 1, Year 3, to August 1, Year 
4, payable under section 6601. The facts establish that E's failure to 
timely file the return and timely pay the tax and failure to pay the 
assessed interest and penalties within the period provided in the 
notice and demand is a result of E's disregard of the rules for filing 
the return and paying the tax and any assessed penalties. Under the 
facts in this paragraph (d)(1)(iv)(B), neither the interest payable 
under section 6601 that accrued on the unpaid tax before notice and 
demand nor the interest that accrued on the unpaid tax and penalties 
after notice and demand is an expense that is actually and necessarily 
incurred in the administration of D's estate for purposes of paragraph 
(a) of this section.
    (C) Example 3. Prior to D's death, the IRS had assessed an income 
tax deficiency against D for the 2009 tax period in the amount of 
$75,000, and penalties in the amount of $X. The assessed tax and 
penalties remained unpaid on D's date of death. On July 1, Year 2, the 
executor of D's estate (E) timely files the estate tax return and 
timely pays the estate tax shown on the

[[Page 38341]]

return to be due. On the same date, E also pays all claims against and 
liabilities of the estate, except for the assessed income tax 
deficiency and penalties for the 2009 tax period. Despite E's awareness 
that the estate had sufficient liquidity and funds to satisfy all 
estate liabilities, including the 2009 income tax deficiency and 
penalties, E does not pay the assessed income tax deficiency, 
penalties, and accrued interest until July 1, Year 4. E's failure to 
pay the assessed income tax deficiency and penalties for the 2009 tax 
period is a result of E's disregard of applicable rules or regulations. 
Even though the underlying income tax deficiency is not attributable to 
E's negligence, disregard of applicable rules, or fraud with intent to 
evade tax, the interest that accrued after July 1, Year 2, on the 
assessed deficiency and penalties is attributable to E's disregard of 
applicable rules or regulations. Accordingly, the post-July 1, Year 2, 
interest is not an expense that is actually and necessarily incurred in 
the administration of D's estate.
    (2) Interest expense on certain loan obligations of the estate. 
Interest on a loan entered into by the estate to facilitate the payment 
of the estate's tax and other liabilities or the administration of the 
estate may be deductible depending on all the facts and circumstances. 
To be a deductible administration expense, interest expense must arise 
from an instrument or contractual arrangement that constitutes 
indebtedness under applicable income tax regulations and general 
principles of Federal tax law. In addition, the interest expense and 
the loan to which interest expense relates must satisfy the requirement 
of Sec.  20.2053-1(b)(2) that they are bona fide in nature based on all 
the facts and circumstances. Further, both the loan to which the 
interest expense relates and the loan terms must be actually and 
necessarily incurred in the administration of the decedent's estate and 
must be essential to the proper settlement of the decedent's estate. 
See paragraph (a) of this section. If the facts and circumstances 
establish that the interest expense arises from an instrument or 
contractual arrangement that constitutes indebtedness under general 
principles of Federal tax law, factors that collectively may support a 
finding that the interest expense also satisfies the additional 
requirements under Sec.  20.2053-1(b)(2) and paragraph (a) of this 
section include, but are not limited to, the following:
    (i) The interest rate on and the terms of the underlying loan 
(whether between related or unrelated parties), including any 
prepayment penalty, are reasonable given all the facts and 
circumstances and comparable to an arms-length loan transaction;
    (ii) The underlying loan is entered into by an executor of the 
decedent's estate acting in the capacity of executor or, if no executor 
is appointed and acting, the person accountable for satisfying the 
liabilities of the estate;
    (iii) The lender properly includes amounts of paid and/or accrued 
interest (including original issue discount as determined under 
sections 1271 through 1275 and the regulations in this part under those 
sections, such as original issue discount attributable to stated 
interest that is treated as part of the stated redemption price at 
maturity because it is not payable at least annually) in gross income 
for Federal income tax purposes, particularly if the lender is a family 
member of the decedent, a related entity, or a beneficiary of the 
decedent's estate or trust (as defined in Sec.  20.2053-1(b)(2)(iii));
    (iv) The loan proceeds are used to satisfy estate liabilities that 
are essential to the proper settlement of the estate, including, but 
not limited to, the Federal estate tax liability;
    (v) The loan term and payment schedule correspond to the estate's 
anticipated ability to make the payments under, and to satisfy, the 
loan, and the loan term does not extend beyond what is reasonably 
necessary;
    (vi) The only practical alternatives to the loan are the sale of 
estate assets at prices that are significantly below-market, the forced 
liquidation of an entity that conducts an active trade or business, or 
some similar financially undesirable course of action;
    (vii) The underlying loan is entered into when the estate's liquid 
assets are insufficient to satisfy estate liabilities, the estate does 
not have control (within the meaning of section 2701(b)(2)) of an 
entity that has liquid assets sufficient to satisfy estate liabilities, 
the estate has no power to direct or compel an entity in which it has 
an interest to sell liquid assets to enable the estate to satisfy its 
liabilities, and the estate's assets are expected to generate 
sufficient cash flow or liquidity to make the payments required under 
the loan;
    (viii) The estate's illiquidity does not occur after the decedent's 
death as a result of the decedent's testamentary estate plan to create 
illiquidity; similarly, the illiquidity does not occur post-death as a 
deliberate result of the action or inaction of the executor who then 
had both knowledge or reason to know of the estate tax liability and a 
reasonable alternative to that action or inaction that could have 
avoided or mitigated the illiquidity;
    (ix) The lender is not a beneficiary of a substantial portion of 
the value of the estate, and is not an entity over which such a 
beneficiary has control (within the meaning of section 2701(b)(2)) or 
the right to compel or direct the making of the loan;
    (x) The lender or lenders are not beneficiaries of the estate whose 
individual share of liability under the loan is substantially similar 
to his or her share of the estate; and
    (xi) The decedent's estate has no right of recovery of estate tax 
against, or of contribution from, the person loaning the funds.
* * * * *
    (f) Applicability date. The rules of this section apply to the 
estates of decedents dying on or after [date of publication of the 
final rule in the Federal Register].
0
Par. 4. Section 20.2053-4 is amended by:
0
1. Revising paragraphs (b)(1)(iv), (b)(2), and (c)(1)(iv) and (v), the 
second sentence of paragraph (c)(3), paragraph (d)(5), and paragraph 
(d)(7)(iii) introductory text.
0
2. In paragraph (d)(7)(iii), Examples 1 through 9 are designated as 
paragraphs (d)(7)(iii)(A) through (I), respectively.
0
3. In newly designated paragraph (d)(7)(iii)(A), removing ``decision,'' 
and ``Sec.  20.2053-3(c) or Sec.  20.2053-3(d)(3)'' adding 
``decision.'' and ``Sec.  20.2053-3(c) or (d)(3)'' in their places, 
respectively.
0
4. In newly designated paragraphs (d)(7)(iii)(B) and (C), removing 
``payment,'', ``Example 1'', and ``Sec.  20.2053-3(c) or Sec.  20.2053-
3(d)(3)'' and adding ``payment.'', ``paragraph (d)(7)(iii)(A) of this 
section (Example 1)'', and ``Sec.  20.2053-3(c) or (d)(3)'' in their 
places, respectively.
0
5. In newly designated paragraph (d)(7)(iii)(D), removing 
``defendants,'', ``Example 1'', and ``Sec.  20.2053-3(c) or Sec.  
20.2053-3(d)(3)'' and adding ``defendants.'', ``paragraph 
(d)(7)(iii)(A) of this section (Example 1)'', and ``Sec.  20.2053-3(c) 
or (d)(3)'' in their places, respectively.
0
6. In newly designated paragraph (d)(7)(iii)(E), removing ``payment,'', 
``Example 1'', and ``Sec.  20.2053-3(c) or Sec.  20.2053-3(d)(3)'' and 
adding ``payment.'', ``paragraph (d)(7)(iii)(A) of this section 
(Example 1)'', and ``Sec.  20.2053-3(c) or (d)(3)'' in their places, 
respectively.
0
7. In newly designated paragraph (d)(7)(iii)(F), removing ``claims,'' 
and ``Sec.  20.2053-3(c) or Sec.  20.2053-3(d)(3)'' and adding 
``claims.'' and ``Sec.  20.2053-3(c) or (d)(3)'' in their places, 
respectively.

[[Page 38342]]

0
8. In newly designated paragraph (d)(7)(iii)(G), removing 
``enforceability,'' and adding ``enforceability.'' in its place.
0
9. In newly designated paragraph (d)(7)(iii)(H), removing ``estate,'' 
and adding ``estate.'' in its place.
0
10. In newly designated paragraph (d)(7)(iii)(I), removing 
``satisfaction,'' and adding ``satisfaction.'' in its place.
0
11. Adding paragraph (d)(7)(iii)(J).
0
12. Revising paragraph (f).
    The revisions and addition read as follows:


Sec.  20.2053-4  Deduction for claims against the estate.

* * * * *
    (b) * * *
    (1) * * *
    (iv) The value of each such claim against the estate is supported 
by a written appraisal document to be filed with the Form 706, United 
States Estate (and Generation-Skipping Transfer) Tax Return, or 
successor form, and the written appraisal document--
    (A) Adequately reflects post-death events that have occurred prior 
to the date on which a deduction is claimed on an estate's Form 706;
    (B) Reports, considers, and appropriately weighs all relevant facts 
and elements of value as are known or are reasonably determinable at 
the time of the appraisal, including the underlying facts of the claim 
against the estate, potential litigating risks, and the current status 
of the claim and procedural history;
    (C) Takes into account post-death events reasonably anticipated to 
occur;
    (D) Identifies an expected date or dates of payment (for purposes 
of determining the applicability of the present value limitation in 
Sec.  20.2053-1(d)(6));
    (E) Explains in detail the methods and analysis that support the 
appraisal's conclusions;
    (F) Is prepared, signed under penalties of perjury, and dated by a 
person who is qualified by knowledge and experience to appraise the 
claim being valued and is not a family member of the decedent, a 
related entity, or a beneficiary of the decedent's estate or revocable 
trust (as those terms are defined in Sec.  20.2053-1(b)(2)(iii)), a 
family member of a beneficiary or a related entity as to a beneficiary 
(as those terms would be defined in Sec.  20.2053-1(b)(2)(iii) if 
references therein to the decedent were replaced with a reference to 
such beneficiary, and without regard to the limitations in Sec.  
20.2053-1(b)(2)(iii) based on the decedent's date of death), or an 
employee or other owner of any of them; and
    (G) Includes a statement providing the basis for the person's 
qualifications to appraise the claim being valued;
* * * * *
    (2) Limitation on deduction. The deduction under this paragraph (b) 
is limited to the value of the related claims or particular assets 
included in decedent's gross estate. See Sec.  20.2053-1(d)(6)(v) for 
the impact of the present value limitation.
* * * * *
    (c) * * *
    (1) * * *
    (iv) The value of each such claim against the estate is supported 
by a written appraisal document to be filed with the Form 706, United 
States Estate (and Generation-Skipping Transfer) Tax Return, or 
successor form, and the written appraisal document--
    (A) Adequately reflects post-death events that have occurred prior 
to the date on which a deduction is claimed on an estate's Form 706;
    (B) Reports, considers and appropriately weighs all relevant facts 
and elements of value as are known or reasonably determinable at the 
time of the appraisal, including the underlying facts of the claim 
against the estate, potential litigating risks, and the current status 
of the claim and procedural history;
    (C) Takes into account post-death events reasonably anticipated to 
occur;
    (D) Identifies an expected date or dates of payment (for purposes 
of determining the applicability of the present value limitation in 
Sec.  20.2053-1(d)(6));
    (E) Explains in detail the methods and analysis that support the 
appraisal's conclusions;
    (F) Is prepared, signed under penalties of perjury, and dated by a 
person who is qualified by knowledge and experience to appraise the 
claim being valued, and is not a family member of the decedent, a 
related entity, or a beneficiary of the decedent's estate or revocable 
trust (as those terms are defined in Sec.  20.2053-1(b)(2)(iii)), a 
family member of a beneficiary or a related entity as to a beneficiary 
(as those terms would be defined in Sec.  20.2053-1(b)(2)(iii) if 
references therein to the decedent were replaced with a reference to 
such beneficiary, and without regard to the limitations in Sec.  
20.2053-1(b)(2)(iii) based on the decedent's date of death), or an 
employee or other owner of any of them; and
    (G) Includes a statement providing the basis for the person's 
qualifications to appraise the claim being valued;
    (v) The total amount deducted by the estate under paragraph (c) of 
this section does not exceed $500,000 (see Sec.  20.2053-1(d)(6)(v) for 
the impact of the present value limitation);
* * * * *
    (3) * * * Assume that each claim is paid within three years after 
the decedent's death, and that the value of each claim is determined 
from a written appraisal document that meets the requirements of 
paragraph (c)(1)(iv) of this section. * * *
    (d) * * *
    (5) Claims founded upon a promise--(i) In general. To be 
deductible, a claim founded on a promise must represent a personal 
obligation of the decedent existing at the time of the decedent's 
death, and the claim must be enforceable against the decedent's estate. 
In addition, except with regard to pledges or subscriptions (see Sec.  
20.2053-5), the deduction for a claim founded upon a promise or 
agreement is limited to the extent that the promise or agreement was 
bona fide and in exchange for adequate and full consideration in money 
or money's worth; that is, the promise or agreement must have been 
bargained for at arm's length and the price must have been an adequate 
and full equivalent reducible to money value.
    (ii) Decedent's promise to guarantee a debt. A deduction for a 
claim founded upon a decedent's agreement to guarantee a debt of 
another is a claim founded on a promise and is subject to the 
limitation in paragraph (d)(5)(i) of this section. For purposes of 
section 2053, a decedent's agreement to guarantee a debt of an entity 
in which the decedent had an interest at the time the guarantee was 
given satisfies the requirement that the agreement be in exchange for 
adequate and full consideration in money or money's worth if, at the 
time the guarantee was given, the decedent had control (within the 
meaning of section 2701(b)(2)) of the entity. Alternatively, this 
requirement is satisfied to the extent the maximum liability of the 
decedent under the guarantee did not exceed, at the time the guarantee 
was given, the fair market value of the decedent's interest in the 
entity. The bona fide nature of the decedent's agreement to guarantee a 
debt of a family member, a related entity, or a beneficiary (as defined 
in Sec.  20.2053-1(b)(2)(iii)) is determined in accordance with Sec.  
20.2053-1(b)(2)(ii). For a claim otherwise deductible under this 
paragraph (d)(5)(ii), the estate's right of contribution or 
reimbursement will reduce the amount deductible in accordance with 
Sec.  20.2053-1(d)(3). Payments made pursuant to the decedent's 
guarantee of a debt are

[[Page 38343]]

deductible only to the extent that the debt for which the guarantee is 
given has not been taken into account in computing the value of the 
gross estate under Sec.  20.2053-7 or otherwise.
* * * * *
    (7) * * *
    (iii) The claimant (C) is not a family member, related entity, or 
beneficiary of the estate of decedent (D), unless otherwise provided, 
and is not the executor (E).
* * * * *
    (J) Example 10: Guarantee. On Date 1, D entered into a guarantee 
agreement with Bank (C) to secure financing for a closely-held business 
(LLC) in which D had a controlling interest. LLC was solvent at the 
time LLC executed a promissory note in the amount of $100x in favor of 
C. Prior to D's death, LLC became insolvent and stopped making payments 
on the note. After D's death, C filed a claim against D's estate for 
payment of the remaining balance due under the note and E paid the full 
amount due. Although E had a right of contribution against LLC for 
primary payment of the indebtedness, LLC was insolvent and no part of 
the debt was collectible at the time E deducted the payment. D's estate 
may deduct the amount paid to C in satisfaction of D's liability under 
the guarantee agreement. The guarantee agreement is considered to have 
been contracted for an adequate and full consideration in money or 
money's worth. The result would be the same if D did not have control 
of LLC as long as the fair market value of D's interest in the LLC on 
Date 1 was at least $100x.
* * * * *
    (f) Applicability date. The rules of this section apply to the 
estates of decedents dying on or after [date of publication of the 
final rule in the Federal Register].

Paul J. Mamo,
Acting Deputy Commissioner for Services and Enforcement.
[FR Doc. 2022-13706 Filed 6-24-22; 4:15 pm]
BILLING CODE 4830-01-P


</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>