Federal Register / Vol. 60, No. 239 / Wednesday, December 13, 1995 / Rules and Regulations 63913

imply in any manner whatsoever that

such person has been sponsored,

recommended or approved, or that such

person’s abilities or qualifications, the

content, quality or accuracy of his

training program, or the positions taken

in the course of resolving any actual or

hypothetical situations presenting

ethical or legal issues, have in any

respect been passed upon or endorsed,

by the Commission, a registered futures

association, or any representative

thereof. Any promotional or

instructional material used in

connection with the training required by

this section must prominently state that

the Commission and any registered

futures association have not reviewed or

approved the specific content of the

training program and do not recommend

the provider of such training: Provided,

however, that this paragraph shall not be

construed to prohibit a statement that a

person is included on a list of ethics

training providers maintained by a

registered futures association if such

statement is true in fact and if the effect

of such a listing is not misrepresented.

* * * * *

Issued in Washington, D.C. on December 7,

1995, by the Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 95–30358 Filed 12–12–95; 8:45 am]

BILLING CODE 6351–01–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 20, and 25

[TD 8630]

RIN 1545–AR56

Actuarial Tables Exceptions

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

income, estate, and gift tax regulations

relating to exceptions to the use of the

valuation tables in the regulations for

valuing annuities, interests for life or a

term of years, and remainder or

reversionary interests, the valuation of

which was the subject of final

regulations published on June 10, 1994.

These regulations are necessary in order

to provide guidance consistent with

court decisions concluding that the

valuation tables are not to be used in

certain situations.

EFFECTIVE DATE: These regulations are

effective December 13, 1995.

FOR FURTHER INFORMATION CONTACT:

William L. Blodgett, telephone (202)

622–3090 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On June 10, 1994, the IRS published

in the Federal Register (59 FR 30100)

final income tax regulations under

sections 170, 642, 664 and 7520 of the

Internal Revenue Code (Code), and final

estate and gift tax regulations under

sections 2031, 2512 and 7520 of the

Code providing actuarial tables to be

used in valuing annuities, interests for

life or a term of years, and remainder or

reversionary interests under section

7520. On June 10, 1994, the IRS also

published in the Federal Register (59

FR 30180) proposed amendments to the

income, estate, and gift tax regulations

prescribing circumstances when the

published actuarial tables cannot be

used to value interests. This regulation

finalizes those amendments.

Written comments responding to the

notice of proposed rulemaking were

received. Requests for a public hearing

were also received but were

subsequently withdrawn. After

consideration of all the comments

received, those amendments are revised

and adopted by this Treasury decision.

Explanation of Provisions

Section 7520(a), which is effective for

transfers after April 30, 1989, provides

that the value of annuities, interests for

life or a term of years, and remainder or

reversionary interests is to be

determined under tables published by

the IRS. Section 7520(e) provides that,

for purposes of section 7520, the term

tables includes formulas. Section

7520(b) provides that section 7520 shall

not apply for purposes of any provision

specified in regulations. The Conference

Report accompanying the Technical and

Miscellaneous Revenue Act of 1988,

H.R. Conf. Rep. No. 1104, 100th Cong.,

2d Sess. 113 (1988) (1988–3 C.B. 603),

states that section 7520 does not apply

in ‘‘situations specified in Treasury

regulations.’’ A summary of the

principal comments received and

revisions made in the final regulations

in response to those comments is

provided below.

1. Valuation of Annuities, Income

Interests, etc.

Under the proposed regulations, the

tables cannot be used if the instrument

of transfer does not provide the

beneficiary of the annuity, income

interest, or remainder interest with the

degree of beneficial enjoyment that is

consistent with the traditional character

of that property interest under

applicable local law. One comment

letter suggested that, as a result of

enactment of section 2702, it may no

longer be necessary to prescribe special

rules in the case of a trust corpus

consisting of nonproductive property. It

was decided to retain these rules

because this issue will continue to arise

in certain situations where section 2702

does not apply; e.g., the valuation of a

gift of an income interest for purposes

of determining the section 2503(b) gift

tax exclusion; the valuation of the

bequest of an income interest for

purposes of the section 2013 estate tax

credit.

In response to comments, the final

regulations provide additional guidance

for determining under what

circumstances a life tenant or term

certain beneficiary of tangible property

possesses adequate beneficial use such

that the tables would be used to value

the interest.

A number of comments were received

on the valuation of an annuity that is

payable from a trust corpus that will

exhaust prior to the annuitant reaching

the presumed terminal age prescribed

by the tables (age 110). Under the

proposed regulations, the interest would

be valued, not as a right to receive the

annuity for the life of the annuitant, but

rather as the right to receive the annuity

for the shorter of the life of the

annuitant or the date on which the

corpus will exhaust. One commentator

agreed that the possibility of exhaustion

of corpus should be taken into account

in cases of relatively severe

underfunding of the trust. However, it

was suggested that, if the underfunding

was relatively less severe, it should be

disregarded. After further consideration

of this issue, the IRS has concluded that

the method described in the proposed

regulations for determining the value of

the annuity is consistent with

fundamental principles for determining

present value and long-standing IRS

position. See, Rev. Rul. 77–454 (1977–

2 C.B. 351); Rev. Rul. 70–452 (1970–2

C.B. 199); Moffett v. Commissioner, 269

F.2d 738 (4th Cir. 1959); United States

v. Dean, 224 F.2d 26 (1st Cir. 1955).

However, in response to requests, the

explanation of the methodology and

computation has been amplified.

2. Terminal Illness

Under the proposed regulations, the

tables cannot be used if the individual,

who is the measuring life with respect

to the property interest, is terminally ill.

Under the proposed regulations, the

individual is terminally ill if that

individual was known to have an

incurable illness or deteriorating

physical condition such that there is at
63914 Federal Register / Vol. 60, No. 239 / Wednesday, December 13, 1995 / Rules and Regulations

least a 50 percent probability that the

individual will die within one year.

One commentator suggested that the

value of a property interest that is

dependent upon a measuring life should

be determined in all events based on the

mortality component contained in Table

80CNSMT (which is based on the life

experience of the general population),

rather than a mortality component that

reflects the actual terminally ill

condition of the individual. The

commentator also suggested that if

departure from the actuarial tables is

deemed appropriate in the case of

terminally ill individuals, then the

standard in Rev. Rul. 80–80 (1980–1

C.B. 194), which is not explicitly

expressed in the form of a percentage

probability of survival (as is the

standard in the proposed regulations),

adequately differentiates between

individuals that should not be

considered terminally ill and those that

should. This commentator also

questioned whether a percentage

probability standard, such as the one

used in the proposed regulations, would

be feasible to administer.

The IRS continues to believe that

mortality tables such as Table

80CNSMT should not be used to predict

the survival probabilities of an

individual whose time of death is

reasonably predictable based on the

facts presented. To determine whether

the proposed test for classifying an

individual as terminally ill would be

feasible, the IRS consulted with a

number of medical specialists. Medical

experts called upon to assess the

probability of survival of a terminally ill

individual base their assessment on

statistical compilations of the

percentage of individuals who survive

for a specified period of time when

suffering with a particular disease.

Thus, the IRS believes that a test for

classifying an individual as terminally

ill can reasonably be based upon the

probability of survival for a specified

period of time.

One commentator suggested that the

mortality test should take into account

the actual period of survival after the

transfer. For example, if the individual

actually survived for one year, that

individual should not be deemed to

have been terminally ill. Although posttransaction events are not ordinarily

determinative for valuation purposes,

such events may provide evidence of

value as of the valuation date.

Accordingly, the final regulations

provide a presumption that if the

individual who is the measuring life

survives for eighteen months or longer

after the transfer, that individual shall

be presumed to have not been

terminally ill on the date of the transfer

unless the contrary is established by

clear and convincing evidence.

The commentator also questioned

whether the proposed test for classifying

an individual as terminally ill would

result in the classification of elderly

people suffering from the general

infirmities of old age as ‘‘terminally ill.’’

The IRS continues to believe that the

test should be consistently applied to

people of all ages. Under the

regulations, the individual must be

inflicted with an incurable illness or

other deteriorating physical condition

that is life threatening. Thus, elderly

people suffering from the general

infirmities of old age, but not from a

specific incurable life-threatening

illness, would not be considered

terminally ill under the test.

Consequently, if an elderly person has

one or more illnesses, none of which,

standing alone or considered together, is

life-threatening, that person would not

be considered to be terminally ill.

The same commentator suggested that

‘‘knowledge’’ of the terminal illness

should be limited to actual knowledge

by the taxpayer or the decedent, rather

than to ‘‘knowledge’’ by any of the

parties involved. However, limitation of

the requisite ‘‘knowledge’’ to the

taxpayer or decedent would present a

significant burden to the IRS regarding

proof and would present opportunities

for easy circumvention. Thus, the IRS

believes that the requirement that the

condition of the individual be ‘‘known,’’

although not necessarily by the taxpayer

or decedent, is reasonable.

Commentators suggested that the

regulations should make it clear that a

special actuarial factor taking into

account a transferor’s terminal illness

may be used in valuing a transfer to a

pooled income fund. The final

regulations incorporate that suggestion.

Comments were received that the

language in § 20.7520–3(b)(3)(ii) of the

proposed regulations regarding the

valuation of a property interest that is

based upon a terminally ill measuring

life, for purposes of determining the

applicable credit for tax on prior

transfers under section 2013, was

ambiguous. Generally, if the final

determination of the estate tax liability

in the transferor’s estate was dependent

on the valuation of the life interest

received by the transferee, then the

value of the property transferred, for

purposes of determining the credit

allowable for the transferee’s estate, is

the value determined previously for the

transferor’s estate. Section 20.7520–

3(b)(3)(ii) of the final regulations

clarifies this rule. The IRS invites

comments on whether the value of a

reversionary interest under section 673

should be determined without regard to

the physical condition of the decedent

immediately before death, a related

issue that was raised by commentators.

3. Application of Actuarial Tables

One commentator suggested that the

tables prescribed by the regulations

must be used for valuing all interests

transferred between April 30, 1989 (the

effective date of section 7520) and

December 13, 1995 (the effective date of

the regulations). However, these

regulations generally adopt principles

established in case law and published

IRS positions. See, e.g., O’Reilly v.

Commissioner, 973 F.2d 1403 (8th Cir.

1992), rem’d, T.C.M. 1994–61

(underproductive income interest);

Estate of McLendon v. Commissioner,

T.C.M. 1993–459; Rev. Rul. 80–80

(1980–1 C.B. 194) (terminal illness of

measuring life); Moffett v.

Commissioner, 269 F.2d 738 (4th Cir.

1959); Rev. Rul. 77–454 (1977–2 C.B.

351) (exhausting corpus). There is no

indication that Congress intended to

supersede this well-established case law

and administrative ruling position when

it enacted section 7520. Consequently,

in the case of transfers prior to the

effective date of these regulations, the

question of whether a particular interest

must be valued based on the tables will

be resolved based on applicable case

law and revenue rulings.

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

12866. Therefore, a regulatory

assessment is not required. It also has

been determined that section 553(b) of

the Administrative Procedure Act (5

U.S.C. chapter 5) and the Regulatory

Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and,

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, the notice of proposed rulemaking

preceding these regulations was

submitted to the Small Business

Administration for comment on its

impact on small business.

Drafting Information

The principal author of these

regulations is William L. Blodgett,

Office of Assistant Chief Counsel

(Passthroughs and Special Industries),

IRS. However, other personnel from the

IRS and Treasury Department

participated in their development.
Federal Register / Vol. 60, No. 239 / Wednesday, December 13, 1995 / Rules and Regulations 63915

List of Subjects

26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

26 CFR Part 20

Estate taxes, Reporting and

recordkeeping requirements.

26 CFR Part 25

Gift taxes, Reporting and

recordkeeping requirements.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 1, 20 and

25 are amended as follows:

PART 1—INCOME TAXES

PARAGRAPH 1. The authority citation

for part 1 continues to read in part as

follows:

Authority: 26 U.S.C. 7805 * * *

PAR. 2. Section 1.7520–3 is amended

by revising paragraph (b) and adding a

sentence at the end of paragraph (c) to

read as follows:

§ 1.7520–3 Limitation on the application of

section 7520.

* * * * *

(b) Other limitations on the

application of section 7520—(1) In

general—(i) Ordinary beneficial

interests. For purposes of this section:

(A) An ordinary annuity interest is the

right to receive a fixed dollar amount at

the end of each year during one or more

measuring lives or for some other

defined period. A standard section 7520

annuity factor for an ordinary annuity

interest represents the present worth of

the right to receive $1.00 per year for a

defined period, using the interest rate

prescribed under section 7520 for the

appropriate month. If an annuity

interest is payable more often than

annually or is payable at the beginning

of each period, a special adjustment

must be made in any computation with

a standard section 7520 annuity factor.

(B) An ordinary income interest is the

right to receive the income from, or the

use of, property during one or more

measuring lives or for some other

defined period. A standard section 7520

income factor for an ordinary income

interest represents the present worth of

the right to receive the use of $1.00 for

a defined period, using the interest rate

prescribed under section 7520 for the

appropriate month.

(C) An ordinary remainder or

reversionary interest is the right to

receive an interest in property at the end

of one or more measuring lives or some

other defined period. A standard section

7520 remainder factor for an ordinary

remainder or reversionary interest

represents the present worth of the right

to receive $1.00 at the end of a defined

period, using the interest rate prescribed

under section 7520 for the appropriate

month.

(ii) Certain restricted beneficial

interests. A restricted beneficial interest

is an annuity, income, remainder, or

reversionary interest that is subject to a

contingency, power, or other restriction,

whether the restriction is provided for

by the terms of the trust, will, or other

governing instrument or is caused by

other circumstances. In general, a

standard section 7520 annuity, income,

or remainder factor may not be used to

value a restricted beneficial interest.

However, a special section 7520

annuity, income, or remainder factor

may be used to value a restricted

beneficial interest under some

circumstances. See paragraph (b)(4)

Example 2 of this section, which

illustrates a situation where a special

section 7520 actuarial factor is needed

to take into account the shorter life

expectancy of the terminally ill

measuring life. See § 1.7520–1(c) for

requesting a special factor from the

Internal Revenue Service.

(iii) Other beneficial interests. If,

under the provisions of this paragraph

(b), the interest rate and mortality

components prescribed under section

7520 are not applicable in determining

the value of any annuity, income,

remainder, or reversionary interest, the

actual fair market value of the interest

(determined without regard to section

7520) is based on all of the facts and

circumstances if and to the extent

permitted by the Internal Revenue Code

provision applicable to the property

interest.

(2) Provisions of governing instrument

and other limitations on source of

payment—(i) Annuities. A standard

section 7520 annuity factor may not be

used to determine the present value of

an annuity for a specified term of years

or the life of one or more individuals

unless the effect of the trust, will, or

other governing instrument is to ensure

that the annuity will be paid for the

entire defined period. In the case of an

annuity payable from a trust or other

limited fund, the annuity is not

considered payable for the entire

defined period if, considering the

applicable section 7520 interest rate at

the valuation date of the transfer, the

annuity is expected to exhaust the fund

before the last possible annuity payment

is made in full. For this purpose, it must

be assumed that it is possible for each

measuring life to survive until age 110.

For example, for a fixed annuity payable

annually at the end of each year, if the

amount of the annuity payment

(expressed as a percentage of the initial

corpus) is less than or equal to the

applicable section 7520 interest rate at

the date of the transfer, the corpus is

assumed to be sufficient to make all

payments. If the percentage exceeds the

applicable section 7520 interest rate and

the annuity is for a definite term of

years, multiply the annual annuity

amount by the Table B term certain

annuity factor, as described in § 1.7520–

1(c)(1), for the number of years of the

defined period. If the percentage

exceeds the applicable section 7520

interest rate and the annuity is payable

for the life of one or more individuals,

multiply the annual annuity amount by

the Table B annuity factor for 110 years

minus the age of the youngest

individual. If the result exceeds the

limited fund, the annuity may exhaust

the fund, and it will be necessary to

calculate a special section 7520 annuity

factor that takes into account the

exhaustion of the trust or fund. This

computation would be modified, if

appropriate, to take into account

annuities with different payment terms.

See § 25.7520–3(b)(2)(v) Example 5 of

this chapter, which provides an

illustration involving an annuity trust

that is subject to exhaustion.

(ii) Income and similar interests—(A)

Beneficial enjoyment. A standard

section 7520 income factor for an

ordinary income interest may not be

used to determine the present value of

an income or similar interest in trust for

a term of years or for the life of one or

more individuals unless the effect of the

trust, will, or other governing

instrument is to provide the income

beneficiary with that degree of

beneficial enjoyment of the property

during the term of the income interest

that the principles of the law of trusts

accord to a person who is unqualifiedly

designated as the income beneficiary of

a trust for a similar period of time. This

degree of beneficial enjoyment is

provided only if it was the transferor’s

intent, as manifested by the provisions

of the governing instrument and the

surrounding circumstances, that the

trust provide an income interest for the

income beneficiary during the specified

period of time that is consistent with the

value of the trust corpus and with its

preservation. In determining whether a

trust arrangement evidences that

intention, the treatment required or

permitted with respect to individual

items must be considered in relation to

the entire system provided for in the

administration of the subject trust.

Similarly, in determining the present
63916 Federal Register / Vol. 60, No. 239 / Wednesday, December 13, 1995 / Rules and Regulations

value of the right to use tangible

property (whether or not in trust) for

one or more measuring lives or for some

other specified period of time, the

interest rate component prescribed

under section 7520 and § 1.7520–1 may

not be used unless, during the specified

period, the effect of the trust, will or

other governing instrument is to provide

the beneficiary with that degree of use,

possession, and enjoyment of the

property during the term of interest that

applicable state law accords to a person

who is unqualifiedly designated as a life

tenant or term holder for a similar

period of time.

(B) Diversions of income and corpus.

A standard section 7520 income factor

for an ordinary income interest may not

be used to value an income interest or

similar interest in property for a term of

years or for one or more measuring lives

if—

(1) The trust, will, or other governing

instrument requires or permits the

beneficiary’s income or other enjoyment

to be withheld, diverted, or

accumulated for another person’s

benefit without the consent of the

income beneficiary; or

(2) The governing instrument requires

or permits trust corpus to be withdrawn

from the trust for another person’s

benefit during the income beneficiary’s

term of enjoyment without the consent

of and accountability to the income

beneficiary for such diversion.

(iii) Remainder and reversionary

interests. A standard section 7520

remainder interest factor for an ordinary

remainder or reversionary interest may

not be used to determine the present

value of a remainder or reversionary

interest (whether in trust or otherwise)

unless, consistent with the preservation

and protection that the law of trusts

would provide for a person who is

unqualifiedly designated as the

remainder beneficiary of a trust for a

similar duration, the effect of the

administrative and dispositive

provisions for the interest or interests

that precede the remainder or

reversionary interest is to assure that the

property will be adequately preserved

and protected (e.g., from erosion,

invasion, depletion, or damage) until

the remainder or reversionary interest

takes effect in possession and

enjoyment. This degree of preservation

and protection is provided only if it was

the transferor’s intent, as manifested by

the provisions of the arrangement and

the surrounding circumstances, that the

entire disposition provide the remainder

or reversionary beneficiary with an

undiminished interest in the property

transferred at the time of the

termination of the prior interest.

(iv) Pooled income fund interests. In

general, pooled income funds are

created and administered to achieve a

special rate of return. A beneficial

interest in a pooled income fund is not

ordinarily valued using a standard

section 7520 income or remainder

interest factor. The present value of a

beneficial interest in a pooled income

fund is determined according to rules

and special remainder factors prescribed

in § 1.642(c)–6 and, when applicable,

the rules set forth in paragraph (b)(3) of

this section, if the individual who is the

measuring life is terminally ill at the

time of the transfer.

(3) Mortality component. The

mortality component prescribed under

section 7520 may not be used to

determine the present value of an

annuity, income interest, remainder

interest, or reversionary interest if an

individual who is a measuring life is

terminally ill at the time of the

transaction. For purposes of this

paragraph (b)(3), an individual who is

known to have an incurable illness or

other deteriorating physical condition is

considered terminally ill if there is at

least a 50 percent probability that the

individual will die within 1 year.

However, if the individual survives for

eighteen months or longer after the date

of the transaction, that individual shall

be presumed to have not been

terminally ill at the time of the

transaction unless the contrary is

established by clear and convincing

evidence.

(4) Examples. The provisions of this

paragraph (b) are illustrated by the

following examples:

Example 1. Annuity funded with

unproductive property. The taxpayer

transfers corporation stock worth $1,000,000

to a trust. The trust provides for a 6 percent

($60,000 per year) annuity in cash or other

property to be paid to a charitable

organization for 25 years and for the

remainder to be distributed to the donor’s

child. The trust specifically authorizes, but

does not require, the trustee to retain the

shares of stock. The section 7520 interest rate

for the month of the transfer is 8.2 percent.

The corporation has paid no dividends on

this stock during the past 5 years, and there

is no indication that this policy will change

in the near future. Under applicable state

law, the corporation is considered to be a

sound investment that satisfies fiduciary

standards. Therefore, the trust’s sole

investment in this corporation is not

expected to adversely affect the interest of

either the annuitant or the remainder

beneficiary. Considering the 6 percent

annuity payout rate and the 8.2 percent

section 7520 interest rate, the trust corpus is

considered sufficient to pay this annuity for

the entire 25-year term of the trust, or even

indefinitely. Although it appears that neither

beneficiary would be able to compel the

trustee to make the trust corpus produce

investment income, the annuity interest in

this case is considered to be an ordinary

annuity interest, and the standard section

7520 annuity factor may be used to

determine the present value of the annuity.

In this case, the section 7520 annuity factor

would represent the right to receive $1.00 per

year for a term of 25 years.

Example 2. Terminal illness. The taxpayer

transfers property worth $1,000,000 to a

charitable remainder unitrust described in

section 664(d)(2) and § 1.664–3. The trust

provides for a fixed-percentage 7 percent

unitrust benefit (each annual payment is

equal to 7 percent of the trust assets as

valued at the beginning of each year) to be

paid quarterly to an individual beneficiary

for life and for the remainder to be

distributed to a charitable organization. At

the time the trust is created, the individual

beneficiary is age 60 and has been diagnosed

with an incurable illness and there is at least

a 50 percent probability of the individual

dying within 1 year. Assuming the

presumption in paragraph (b)(3) of this

section does not apply, because there is at

least a 50 percent probability that this

beneficiary will die within 1 year, the

standard section 7520 unitrust remainder

factor for a person age 60 from the valuation

tables may not be used to determine the

present value of the charitable remainder

interest. Instead, a special unitrust remainder

factor must be computed that is based on the

section 7520 interest rate and that takes into

account the projection of the individual

beneficiary’s actual life expectancy.

(5) Additional limitations. Section

7520 does not apply to the extent as

may otherwise be provided by the

Commissioner.

(c) * * * The provisions of paragraph

(b) of this section are effective with

respect to transactions after December

13, 1995.

PART 20—ESTATE TAX; ESTATES OF

DECEDENTS DYING AFTER AUGUST

16, 1954

Par. 3. The authority citation for part

20 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 4. Section 20.7520–3 is amended

by revising paragraph (b) and adding a

sentence at the end of paragraph (c) to

read as follows:

§ 20.7520–3 Limitation on the application

of section 7520.

* * * * *

(b) Other limitations on the

application of section 7520— (1) In

general—(i) Ordinary beneficial

interests. For purposes of this section:

(A) An ordinary annuity interest is the

right to receive a fixed dollar amount at

the end of each year during one or more

measuring lives or for some other

defined period. A standard section 7520

annuity factor for an ordinary annuity
Federal Register / Vol. 60, No. 239 / Wednesday, December 13, 1995 / Rules and Regulations 63917

interest represents the present worth of

the right to receive $1.00 per year for a

defined period, using the interest rate

prescribed under section 7520 for the

appropriate month. If an annuity

interest is payable more often than

annually or is payable at the beginning

of each period, a special adjustment

must be made in any computation with

a standard section 7520 annuity factor.

(B) An ordinary income interest is the

right to receive the income from or the

use of property during one or more

measuring lives or for some other

defined period. A standard section 7520

income factor for an ordinary income

interest represents the present worth of

the right to receive the use of $1.00 for

a defined period, using the interest rate

prescribed under section 7520 for the

appropriate month.

(C) An ordinary remainder or

reversionary interest is the right to

receive an interest in property at the end

of one or more measuring lives or some

other defined period. A standard section

7520 remainder factor for an ordinary

remainder or reversionary interest

represents the present worth of the right

to receive $1.00 at the end of a defined

period, using the interest rate prescribed

under section 7520 for the appropriate

month.

(ii) Certain restricted beneficial

interests. A restricted beneficial interest

is an annuity, income, remainder, or

reversionary interest that is subject to

any contingency, power, or other

restriction, whether the restriction is

provided for by the terms of the trust,

will, or other governing instrument or is

caused by other circumstances. In

general, a standard section 7520

annuity, income, or remainder factor

may not be used to value a restricted

beneficial interest. However, a special

section 7520 annuity, income, or

remainder factor may be used to value

a restricted beneficial interest under

some circumstances. See paragraphs

(b)(2)(v) Example 4 and (b)(4) Example

1 of this section, which illustrate

situations where special section 7520

actuarial factors are needed to take into

account limitations on beneficial

interests. See § 20.7520–1(c) for

requesting a special factor from the

Internal Revenue Service.

(iii) Other beneficial interests. If,

under the provisions of this paragraph

(b), the interest rate and mortality

components prescribed under section

7520 are not applicable in determining

the value of any annuity, income,

remainder, or reversionary interest, the

actual fair market value of the interest

(determined without regard to section

7520) is based on all of the facts and

circumstances if and to the extent

permitted by the Internal Revenue Code

provision applicable to the property

interest.

(2) Provisions of governing instrument

and other limitations on source of

payment—(i) Annuities. A standard

section 7520 annuity factor may not be

used to determine the present value of

an annuity for a specified term of years

or the life of one or more individuals

unless the effect of the trust, will, or

other governing instrument is to ensure

that the annuity will be paid for the

entire defined period. In the case of an

annuity payable from a trust or other

limited fund, the annuity is not

considered payable for the entire

defined period if, considering the

applicable section 7520 interest rate at

the valuation date of the transfer, the

annuity is expected to exhaust the fund

before the last possible annuity payment

is made in full. For this purpose, it must

be assumed that it is possible for each

measuring life to survive until age 110.

For example, for a fixed annuity payable

annually at the end of each year, if the

amount of the annuity payment

(expressed as a percentage of the initial

corpus) is less than or equal to the

applicable section 7520 interest rate at

the date of the transfer, the corpus is

assumed to be sufficient to make all

payments. If the percentage exceeds the

applicable section 7520 interest rate and

the annuity is for a definite term of

years, multiply the annual annuity

amount by the Table B term certain

annuity factor, as described in

§ 20.7520–1(c)(1), for the number of

years of the defined period. If the

percentage exceeds the applicable

section 7520 interest rate and the

annuity is payable for the life of one or

more individuals, multiply the annual

annuity amount by the Table B annuity

factor for 110 years minus the age of the

youngest individual. If the result

exceeds the limited fund, the annuity

may exhaust the fund, and it will be

necessary to calculate a special section

7520 annuity factor that takes into

account the exhaustion of the trust or

fund. This computation would be

modified, if appropriate, to take into

account annuities with different

payment terms. See § 25.7520–3(b)(2)(v)

Example 5 of this chapter, which

provides an illustration involving an

annuity trust that is subject to

exhaustion.

(ii) Income and similar interests—(A)

Beneficial enjoyment. A standard

section 7520 income factor for an

ordinary income interest may not be

used to determine the present value of

an income or similar interest in trust for

a term of years, or for the life of one or

more individuals, unless the effect of

the trust, will, or other governing

instrument is to provide the income

beneficiary with that degree of

beneficial enjoyment of the property

during the term of the income interest

that the principles of the law of trusts

accord to a person who is unqualifiedly

designated as the income beneficiary of

a trust for a similar period of time. This

degree of beneficial enjoyment is

provided only if it was the transferor’s

intent, as manifested by the provisions

of the governing instrument and the

surrounding circumstances, that the

trust provide an income interest for the

income beneficiary during the specified

period of time that is consistent with the

value of the trust corpus and with its

preservation. In determining whether a

trust arrangement evidences that

intention, the treatment required or

permitted with respect to individual

items must be considered in relation to

the entire system provided for in the

administration of the subject trust.

Similarly, in determining the present

value of the right to use tangible

property (whether or not in trust) for

one or more measuring lives or for some

other specified period of time, the

interest rate component prescribed

under section 7520 and § 1.7520–1 of

this chapter may not be used unless,

during the specified period, the effect of

the trust, will or other governing

instrument is to provide the beneficiary

with that degree of use, possession, and

enjoyment of the property during the

term of interest that applicable state law

accords to a person who is unqualifiedly

designated as a life tenant or term

holder for a similar period of time.

(B) Diversions of income and corpus.

A standard section 7520 income factor

for an ordinary income interest may not

be used to value an income interest or

similar interest in property for a term of

years, or for one or more measuring

lives, if—

(1) The trust, will, or other governing

instrument requires or permits the

beneficiary’s income or other enjoyment

to be withheld, diverted, or

accumulated for another person’s

benefit without the consent of the

income beneficiary; or

(2) The governing instrument requires

or permits trust corpus to be withdrawn

from the trust for another person’s

benefit without the consent of the

income beneficiary during the income

beneficiary’s term of enjoyment and

without accountability to the income

beneficiary for such diversion.

(iii) Remainder and reversionary

interests. A standard section 7520

remainder interest factor for an ordinary

remainder or reversionary interest may

not be used to determine the present
63918 Federal Register / Vol. 60, No. 239 / Wednesday, December 13, 1995 / Rules and Regulations

value of a remainder or reversionary

interest (whether in trust or otherwise)

unless, consistent with the preservation

and protection that the law of trusts

would provide for a person who is

unqualifiedly designated as the

remainder beneficiary of a trust for a

similar duration, the effect of the

administrative and dispositive

provisions for the interest or interests

that precede the remainder or

reversionary interest is to assure that the

property will be adequately preserved

and protected (e.g., from erosion,

invasion, depletion, or damage) until

the remainder or reversionary interest

takes effect in possession and

enjoyment. This degree of preservation

and protection is provided only if it was

the transferor’s intent, as manifested by

the provisions of the arrangement and

the surrounding circumstances, that the

entire disposition provide the remainder

or reversionary beneficiary with an

undiminished interest in the property

transferred at the time of the

termination of the prior interest.

(iv) Pooled income fund interests. In

general, pooled income funds are

created and administered to achieve a

special rate of return. A beneficial

interest in a pooled income fund is not

ordinarily valued using a standard

section 7520 income or remainder

interest factor. The present value of a

beneficial interest in a pooled income

fund is determined according to rules

and special remainder factors prescribed

in § 1.642(c)–6 of this chapter and,

when applicable, the rules set forth

under paragraph (b)(3) of this section if

the individual who is the measuring life

is terminally ill at the time of the

transfer.

(v) Examples. The provisions of this

paragraph (b)(2) are illustrated by the

following examples:

Example 1. Unproductive property. A died,

survived by B and C. B died two years after

A. A’s will provided for a bequest of

corporation stock in trust under the terms of

which all of the trust income was paid to B

for life. After the death of B, the trust

terminated and the trust property was

distributed to C. The trust specifically

authorized, but did not require, the trustee to

retain the shares of stock. The corporation

paid no dividends on this stock during the

5 years before A’s death and the 2 years

before B’s death. There was no indication

that this policy would change after A’s death.

Under applicable state law, the corporation is

considered to be a sound investment that

satisfies fiduciary standards. The facts and

circumstances, including applicable state

law, indicate that B did not have the legal

right to compel the trustee to make the trust

corpus productive in conformity with the

requirements for a lifetime trust income

interest under applicable local law.

Therefore, B’s life income interest in this case

is considered nonproductive. Consequently,

B’s income interest may not be valued

actuarially under this section.

Example 2. Beneficiary’s right to make

trust productive. The facts are the same as in

Example 1, except that the trustee is not

specifically authorized to retain the shares of

stock. Further, the terms of the trust

specifically provide that B, the life income

beneficiary, may require the trustee to make

the trust corpus productive consistent with

income yield standards for trusts under

applicable state law. Under that law, the

minimum rate of income that a productive

trust may produce is substantially below the

section 7520 interest rate for the month of A’s

death. In this case, because B has the right

to compel the trustee to make the trust

productive for purposes of applicable local

law during the beneficiary’s lifetime, the

income interest is considered an ordinary

income interest for purposes of this

paragraph, and the standard section 7520 life

income interest factor may be used to

determine the present value of B’s income

interest.

Example 3. Discretionary invasion of

corpus. The decedent, A, transferred property

to a trust under the terms of which all of the

trust income is to be paid to A’s child for life

and the remainder of the trust is to be

distributed to a grandchild. The trust

authorizes the trustee without restriction to

distribute corpus to A’s surviving spouse for

the spouse’s comfort and happiness. In this

case, because the trustee’s power to invade

trust corpus is unrestricted, the exercise of

the power could result in the termination of

the income interest at any time.

Consequently, the income interest is not

considered an ordinary income interest for

purposes of this paragraph, and may not be

valued actuarially under this section.

Example 4. Limited invasion of corpus.

The decedent, A, bequeathed property to a

trust under the terms of which all of the trust

income is to be paid to A’s child for life and

the remainder is to be distributed to A’s

grandchild. The trust authorizes the child to

withdraw up to $5,000 per year from the trust

corpus. In this case, the child’s power to

invade trust corpus is limited to an

ascertainable amount each year. Annual

invasions of any amount would be expected

to progressively diminish the property from

which the child’s income is paid.

Consequently, the income interest is not

considered an ordinary income interest for

purposes of this paragraph, and the standard

section 7520 income interest factor may not

be used to determine the present value of the

income interest. Nevertheless, the present

value of the child’s income interest is

ascertainable by making a special actuarial

calculation that would take into account not

only the initial value of the trust corpus, the

section 7520 interest rate for the month of the

transfer, and the mortality component for the

child’s age, but also the assumption that the

trust corpus will decline at the rate of $5,000

each year during the child’s lifetime. The

child’s right to receive an amount not in

excess of $5,000 per year may be separately

valued in this instance and, assuming the

trust corpus would not exhaust before the

child would attain age 110, would be

considered an ordinary annuity interest.

Example 5. Power to consume. The

decedent, A, devised a life estate in 3 parcels

of real estate to A’s surviving spouse with the

remainder to a child, or, if the child doesn’t

survive, to the child’s estate. A also conferred

upon the spouse an unrestricted power to

consume the property, which includes the

right to sell part or all of the property and

to use the proceeds for the spouse’s support,

comfort, happiness, and other purposes. Any

portion of the property or its sale proceeds

remaining at the death of the surviving

spouse is to vest by operation of law in the

child at that time. The child predeceased the

surviving spouse. In this case, the surviving

spouse’s power to consume the corpus is

unrestricted, and the exercise of the power

could entirely exhaust the remainder interest

during the life of the spouse. Consequently,

the remainder interest that is includible in

the child’s estate is not considered an

ordinary remainder interest for purposes of

this paragraph and may not be valued

actuarially under this section.

(3) Mortality component—(i) Terminal

illness. Except as provided in paragraph

(b)(3)(ii) of this section, the mortality

component prescribed under section

7520 may not be used to determine the

present value of an annuity, income

interest, remainder interest, or

reversionary interest if an individual

who is a measuring life is terminally ill

at the time of the decedent’s death. For

purposes of this paragraph (b)(3), an

individual who is known to have an

incurable illness or other deteriorating

physical condition is considered

terminally ill if there is at least a 50

percent probability that the individual

will die within 1 year. However, if the

individual survives for eighteen months

or longer after the date of the decedent’s

death, that individual shall be presumed

to have not been terminally ill at the

date of death unless the contrary is

established by clear and convincing

evidence.

(ii) Terminal illness exceptions. In the

case of the allowance of the credit for

tax on a prior transfer under section

2013, if a final determination of the

federal estate tax liability of the

transferor’s estate has been made under

circumstances that required valuation of

the life interest received by the

transferee, the value of the property

transferred, for purposes of the credit

allowable to the transferee’s estate, shall

be the value determined previously in

the transferor’s estate. Otherwise, for

purposes of section 2013, the provisions

of paragraph (b)(3)(i) of this section

shall govern in valuing the property

transferred. The value of a decedent’s

reversionary interest under sections

2037(b) and 2042(2) shall be determined

without regard to the physical

condition, immediately before the

decedent’s death, of the individual who

is the measuring life.
Federal Register / Vol. 60, No. 239 / Wednesday, December 13, 1995 / Rules and Regulations 63919

(iii) Death resulting from common

accidents. The mortality component

prescribed under section 7520 may not

be used to determine the present value

of an annuity, income interest,

remainder interest, or reversionary

interest if the decedent, and the

individual who is the measuring life,

die as a result of a common accident or

other occurrence.

(4) Examples. The provisions of

paragraph (b)(3) of this section are

illustrated by the following examples:

Example 1. Terminal illness. The decedent

bequeaths $1,000,000 to a trust under the

terms of which the trustee is to pay $103,000

per year to a charitable organization during

the life of the decedent’s child. Upon the

death of the child, the remainder in the trust

is to be distributed to the decedent’s

grandchild. The child, who is age 60, has

been diagnosed with an incurable illness,

and there is at least a 50 percent probability

of the child dying within 1 year. Assuming

the presumption provided for in paragraph

(b)(3)(i) of this section does not apply, the

standard life annuity factor for a person age

60 may not be used to determine the present

value of the charitable organization’s annuity

interest because there is at least a 50 percent

probability that the child, who is the

measuring life, will die within 1 year.

Instead, a special section 7520 annuity factor

must be computed that takes into account the

projection of the child’s actual life

expectancy.

Example 2. Deaths resulting from common

accidents, etc. The decedent’s will

establishes a trust to pay income to the

decedent’s surviving spouse for life. The will

provides that, upon the spouse’s death or, if

the spouse fails to survive the decedent,

upon the decedent’s death the trust property

is to pass to the decedent’s children. The

decedent and the decedent’s spouse die

simultaneously in an accident under

circumstances in which it was impossible to

determine who survived the other. Even if

the terms of the will and applicable state law

presume that the decedent died first with the

result that the property interest is considered

to have passed in trust for the benefit of the

spouse for life, after which the remainder is

to be distributed to the decedent’s children,

the spouse’s life income interest may not be

valued by use of the mortality component

described under section 7520. The result

would be the same even if it was established

that the spouse survived the decedent.

(5) Additional limitations. Section

7520 does not apply to the extent as

may otherwise be provided by the

Commissioner.

(c) * * * The provisions of

paragraph (b) of this section are effective

with respect to estates of decedents

dying after December 13, 1995.

PART 25—GIFT TAX; GIFTS MADE

AFTER DECEMBER 31, 1954

Par. 5. The authority citation for part

25 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *.

Par. 6. In the list below, for each

section indicated in the left column,

remove the language in the middle

column and add the language in the

right column:

Section Remove Add

25.2522(c)–3(c)(2)(i) 6th sentence ..................... (e)(2) (ii), (iii), and (iv) ........................................ (c)(2) (ii), (iii), and (iv).

25.2522(c)–3(c)(2) (vi)(a) 2nd sentence ............ Subdivision (v) .................................................... Paragraph (c)(2)(vi).

25.2522(c)–3(c)(2) (vii)(a) 2nd sentence ............ Subdivision (vi) ................................................... Paragraph (c)(2)(vii).

25.2522(c)–3(d)(2) introductory text ................... Subdivision (iv), (v), or (vi) of paragraph (c)(2) .. Paragraph (c)(2) (v), (vi), or (vii).

25.2522(c)–3(d)(2) (iv) 1st sentence .................. Paragraph (c)(2)(v) ............................................. Paragraph (c)(2)(vi).

25.2522(c)–3(d)(2)(iv), Example (1) 1st sentence.Paragraph (c)(2)(v) ............................................. Paragraph (c)(2)(vi).

25.2522(c)–3(d)(2)(iv), Example (2) 1st sentence.Paragraph (c)(2)(v) ............................................. Paragraph (c)(2)(vi).

25.2522(c)–3(d)(2)(iv), Example (3) 1st sentence (each place it appears).Paragraph (c)(2)(v) ............................................. Paragraph (c)(2)(vi).

25.2522(c)–3(d)(2)(iv), Example (4) last sentence.Paragraph (c)(2)(v)(e) ......................................... Paragraph (c)(2)(vi)(e)

25.2522(c)–3(d)(2)(v) .......................................... Paragraph (c)(2)(vi) ............................................ Paragraph (c)(2)(vii).

Par. 7. Section 25.7520–3 is amended

by revising paragraph (b) and adding a

sentence at the end of paragraph (c) to

read as follows:

§ 25.7520–3 Limitation on the application

of section 7520.

* * * * *

(b) Other limitations on the

application of section 7520—(1) In

general—(i) Ordinary beneficial

interests. For purposes of this section:

(A) An ordinary annuity interest is the

right to receive a fixed dollar amount at

the end of each year during one or more

measuring lives or for some other

defined period. A standard section 7520

annuity factor for an ordinary annuity

interest represents the present worth of

the right to receive $1.00 per year for a

defined period, using the interest rate

prescribed under section 7520 for the

appropriate month. If an annuity

interest is payable more often than

annually or is payable at the beginning

of each period, a special adjustment

must be made in any computation with

a standard section 7520 annuity factor.

(B) An ordinary income interest is the

right to receive the income from or the

use of property during one or more

measuring lives or for some other

defined period. A standard section 7520

income factor for an ordinary income

interest represents the present worth of

the right to receive the use of $1.00 for

a defined period, using the interest rate

prescribed under section 7520 for the

appropriate month. However, in the

case of certain gifts made after October

8, 1990, if the donor does not retain a

qualified annuity, unitrust, or

reversionary interest, the value of any

interest retained by the donor is

considered to be zero if the remainder

beneficiary is a member of the donor’s

family. See § 25.2702–2.

(C) An ordinary remainder or

reversionary interest is the right to

receive an interest in property at the end

of one or more measuring lives or some

other defined period. A standard section

7520 remainder factor for an ordinary

remainder or reversionary interest

represents the present worth of the right

to receive $1.00 at the end of a defined

period, using the interest rate prescribed

under section 7520 for the appropriate

month.

(ii) Certain restricted beneficial

interests. A restricted beneficial interest

is an annuity, income, remainder, or

reversionary interest that is subject to

any contingency, power, or other

restriction, whether the restriction is

provided for by the terms of the trust,

will, or other governing instrument or is

caused by other circumstances. In

general, a standard section 7520

annuity, income, or remainder factor

may not be used to value a restricted

beneficial interest. However, a special

section 7520 annuity, income, or

remainder factor may be used to value

a restricted beneficial interest under

some circumstances. See paragraphs
63920 Federal Register / Vol. 60, No. 239 / Wednesday, December 13, 1995 / Rules and Regulations

(b)(2)(v) Example 5 and (b)(4) of this

section, which illustrate situations in

which special section 7520 actuarial

factors are needed to take into account

limitations on beneficial interests. See

§ 25.7520–1(c) for requesting a special

factor from the Internal Revenue

Service.

(iii) Other beneficial interests. If,

under the provisions of this paragraph

(b), the interest rate and mortality

components prescribed under section

7520 are not applicable in determining

the value of any annuity, income,

remainder, or reversionary interest, the

actual fair market value of the interest

(determined without regard to section

7520) is based on all of the facts and

circumstances if and to the extent

permitted by the Internal Revenue Code

provision applicable to the property

interest.

(2) Provisions of governing instrument

and other limitations on source of

payment—(i) Annuities. A standard

section 7520 annuity factor may not be

used to determine the present value of

an annuity for a specified term of years

or the life of one or more individuals

unless the effect of the trust, will, or

other governing instrument is to ensure

that the annuity will be paid for the

entire defined period. In the case of an

annuity payable from a trust or other

limited fund, the annuity is not

considered payable for the entire

defined period if, considering the

applicable section 7520 interest rate on

the valuation date of the transfer, the

annuity is expected to exhaust the fund

before the last possible annuity payment

is made in full. For this purpose, it must

be assumed that it is possible for each

measuring life to survive until age 110.

For example, for a fixed annuity payable

annually at the end of each year, if the

amount of the annuity payment

(expressed as a percentage of the initial

corpus) is less than or equal to the

applicable section 7520 interest rate at

the date of the transfer, the corpus is

assumed to be sufficient to make all

payments. If the percentage exceeds the

applicable section 7520 interest rate and

the annuity is for a definite term of

years, multiply the annual annuity

amount by the Table B term certain

annuity factor, as described in

§ 25.7520–1(c)(1), for the number of

years of the defined period. If the

percentage exceeds the applicable

section 7520 interest rate and the

annuity is payable for the life of one or

more individuals, multiply the annual

annuity amount by the Table B annuity

factor for 110 years minus the age of the

youngest individual. If the result

exceeds the limited fund, the annuity

may exhaust the fund, and it will be

necessary to calculate a special section

7520 annuity factor that takes into

account the exhaustion of the trust or

fund. This computation would be

modified, if appropriate, to take into

account annuities with different

payment terms.

(ii) Income and similar interests—(A)

Beneficial enjoyment. A standard

section 7520 income factor for an

ordinary income interest is not to be

used to determine the present value of

an income or similar interest in trust for

a term of years or for the life of one or

more individuals unless the effect of the

trust, will, or other governing

instrument is to provide the income

beneficiary with that degree of

beneficial enjoyment of the property

during the term of the income interest

that the principles of the law of trusts

accord to a person who is unqualifiedly

designated as the income beneficiary of

a trust for a similar period of time. This

degree of beneficial enjoyment is

provided only if it was the transferor’s

intent, as manifested by the provisions

of the governing instrument and the

surrounding circumstances, that the

trust provide an income interest for the

income beneficiary during the specified

period of time that is consistent with the

value of the trust corpus and with its

preservation. In determining whether a

trust arrangement evidences that

intention, the treatment required or

permitted with respect to individual

items must be considered in relation to

the entire system provided for in the

administration of the subject trust.

Similarly, in determining the present

value of the right to use tangible

property (whether or not in trust) for

one or more measuring lives or for some

other specified period of time, the

interest rate component prescribed

under section 7520 and § 1.7520–1 of

this chapter may not be used unless,

during the specified period, the effect of

the trust, will or other governing

instrument is to provide the beneficiary

with that degree of use, possession, and

enjoyment of the property during the

term of interest that applicable state law

accords to a person who is unqualifiedly

designated as a life tenant or term

holder for a similar period of time.

(B) Diversions of income and corpus.

A standard section 7520 income factor

for an ordinary income interest may not

be used to value an income interest or

similar interest in property for a term of

years, or for one or more measuring

lives, if—

(1) The trust, will, or other governing

instrument requires or permits the

beneficiary’s income or other enjoyment

to be withheld, diverted, or

accumulated for another person’s

benefit without the consent of the

income beneficiary; or

(2) The governing instrument requires

or permits trust corpus to be withdrawn

from the trust for another person’s

benefit without the consent of the

income beneficiary during the income

beneficiary’s term of enjoyment and

without accountability to the income

beneficiary for such diversion.

(iii) Remainder and reversionary

interests. A standard section 7520

remainder interest factor for an ordinary

remainder or reversionary interest may

not be used to determine the present

value of a remainder or reversionary

interest (whether in trust or otherwise)

unless, consistent with the preservation

and protection that the law of trusts

would provide for a person who is

unqualifiedly designated as the

remainder beneficiary of a trust for a

similar duration, the effect of the

administrative and dispositive

provisions for the interest or interests

that precede the remainder or

reversionary interest is to assure that the

property will be adequately preserved

and protected (e.g., from erosion,

invasion, depletion, or damage) until

the remainder or reversionary interest

takes effect in possession and

enjoyment. This degree of preservation

and protection is provided only if it was

the transferor’s intent, as manifested by

the provisions of the arrangement and

the surrounding circumstances, that the

entire disposition provide the remainder

or reversionary beneficiary with an

undiminished interest in the property

transferred at the time of the

termination of the prior interest.

(iv) Pooled income fund interests. In

general, pooled income funds are

created and administered to achieve a

special rate of return. A beneficial

interest in a pooled income fund is not

ordinarily valued using a standard

section 7520 income or remainder

interest factor. The present value of a

beneficial interest in a pooled income

fund is determined according to rules

and special remainder factors prescribed

in § 1.642(c)-6 of this chapter and, when

applicable, the rules set forth under

paragraph (b)(3) of this section if the

individual who is the measuring life is

terminally ill at the time of the transfer.

(v) Examples. The provisions of this

paragraph (b)(2) are illustrated by the

following examples:

Example 1. Unproductive property. The

donor transfers corporation stock to a trust

under the terms of which all of the trust

income is payable to A for life. Considering

the applicable federal rate under section 7520

and the appropriate life estate factor for a

person A’s age, the value of A’s income

interest, if valued under this section, would
Federal Register / Vol. 60, No. 239 / Wednesday, December 13, 1995 / Rules and Regulations 63921

be $10,000. After A’s death, the trust is to

terminate and the trust property is to be

distributed to B. The trust specifically

authorizes, but does not require, the trustee

to retain the shares of stock. The corporation

has paid no dividends on this stock during

the past 5 years, and there is no indication

that this policy will change in the near

future. Under applicable state law, the

corporation is considered to be a sound

investment that satisfies fiduciary standards.

The facts and circumstances, including

applicable state law, indicate that the income

beneficiary would not have the legal right to

compel the trustee to make the trust corpus

productive in conformity with the

requirements for a lifetime trust income

interest under applicable local law.

Therefore, the life income interest in this

case is considered nonproductive.

Consequently, A’s income interest may not

be valued actuarially under this section.

Example 2. Beneficiary’s right to make

trust productive. The facts are the same as in

Example 1, except that the trustee is not

specifically authorized to retain the shares of

corporation stock. Further, the terms of the

trust specifically provide that the life income

beneficiary may require the trustee to make

the trust corpus productive consistent with

income yield standards for trusts under

applicable state law. Under that law, the

minimum rate of income that a productive

trust may produce is substantially below the

section 7520 interest rate on the valuation

date. In this case, because A, the income

beneficiary, has the right to compel the

trustee to make the trust productive for

purposes of applicable local law during A’s

lifetime, the income interest is considered an

ordinary income interest for purposes of this

paragraph, and the standard section 7520 life

income factor may be used to determine the

value of A’s income interest. However, in the

case of gifts made after October 8, 1990, if the

donor was the life income beneficiary, the

value of the income interest would be

considered to be zero in this situation. See

§ 25.2702–2.

Example 3. Annuity trust funded with

unproductive property. The donor, who is

age 60, transfers corporation stock worth

$1,000,000 to a trust. The trust will pay a 6

percent ($60,000 per year) annuity in cash or

other property to the donor for 10 years or

until the donor’s prior death. Upon the

termination of the trust, the trust property is

to be distributed to the donor’s child. The

section 7520 rate for the month of the transfer

is 8.2 percent. The corporation has paid no

dividends on the stock during the past 5

years, and there is no indication that this

policy will change in the near future. Under

applicable state law, the corporation is

considered to be a sound investment that

satisfies fiduciary standards. Therefore, the

trust’s sole investment in this corporation is

not expected to adversely affect the interest

of either the annuity beneficiary or the

remainder beneficiary. Considering the 6

percent annuity payout rate and the 8.2

percent section 7520 interest rate, the trust

corpus is considered sufficient to pay this

annuity for the entire 10-year term of the

trust, or even indefinitely. The trust

specifically authorizes, but does not require,

the trustee to retain the shares of stock.

Although it appears that neither beneficiary

would be able to compel the trustee to make

the trust corpus produce investment income,

the annuity interest in this case is considered

to be an ordinary annuity interest, and a

section 7520 annuity factor may be used to

determine the present value of the annuity.

In this case, the section 7520 annuity factor

would represent the right to receive $1.00 per

year for a term of 10 years or the prior death

of a person age 60.

Example 4. Unitrust funded with

unproductive property. The facts are the

same as in Example 3, except that the donor

has retained a unitrust interest equal to 7

percent of the value of the trust property,

valued as of the beginning of each year.

Although the trust corpus is nonincomeproducing, the present value of the donor’s

retained unitrust interest may be determined

by using the section 7520 unitrust factor for

a term of years or a prior death.

Example 5. Eroding corpus in an annuity

trust. (i) The donor, who is age 60 and in

normal health, transfers property worth

$1,000,000 to a trust. The trust will pay a 10

percent ($100,000 per year) annuity to a

charitable organization for the life of the

donor, payable annually, and the remainder

will be distributed to the donor’s child. The

section 7520 rate for the month of the transfer

is 6.8 percent. First, it is necessary to

determine whether the annuity may exhaust

the corpus before all annuity payments are

made. Because it is assumed that any

measuring life may survive until age 110, any

life annuity could require payments until the

measuring life reaches age 110. Based on a

section 7520 interest rate of 6.8 percent, the

determination of whether the annuity may

exhaust the corpus before the annuity

payments are made is computed as follows:

Age to which life annuity may continue .................................................................................................................................... 110

Less: Age of measuring life at date of transfer ........................................................................................................................... 60

Number of years annuity may continue ........................................................................................................................... 50

Annual annuity payment ............................................................................................................................................................. $100,000.00

Times: Table B annuity factor for 50 years ................................................................................................................................. 14.1577

Present value of term certain annuity .............................................................................................................................. 1,415,770.00

(ii) Since the present value of an annuity

for a term of 50 years exceeds the corpus, the

annuity may exhaust the trust before all

payments are made. Consequently, the

annuity must be valued as an annuity

payable for a term of years or until the prior

death of the annuitant, with the term of years

determined by when the fund will be

exhausted by the annuity payments.

(iii) Using factors based on Table

80CNSMT at 6.8 percent, it is determined

that the fund will be sufficient to make 17

annual payments, but not to make the entire

18th payment. Specifically, the initial corpus

will be able to make payments of $67,287.26

per year for 17 years plus payments of

$32,712.74 per year for 18 years. The annuity

is valued by adding the value of the two

separate temporary annuities.

(iv) Based on Table H of Publication 1457

(a copy of this publication may be purchased

from the Superintendent of Documents,

United States Government Printing Office,

Washington, DC 20402), the present value of

an annuity of $67,287.26 per year payable for

17 years or until the prior death of a person

aged 60 is $579,484.61 ($67,287.26 × 8.6121).

The present value of an annuity of

$32,712.74 per year payable for 18 years or

until the prior death of a person aged 60 is

$287,731.45 ($32,712.74 × 8.7957). Thus, the

present value of the charitable annuity

interest is $867,216.06 ($579,484.61 +

$287,731.45).

(3) Mortality component. The

mortality component prescribed under

section 7520 may not be used to

determine the present value of an

annuity, income interest, remainder

interest, or reversionary interest if an

individual who is a measuring life dies

or is terminally ill at the time the gift

is completed. For purposes of this

paragraph (b)(3), an individual who is

known to have an incurable illness or

other deteriorating physical condition is

considered terminally ill if there is at

least a 50 percent probability that the

individual will die within 1 year.

However, if the individual survives for

eighteen months or longer after the date

the gift is completed, that individual

shall be presumed to have not been

terminally ill at the date the gift was

completed unless the contrary is

established by clear and convincing

evidence.

(4) Example. The provisions of

paragraph (b)(3) of this section are

illustrated by the following example:

Example. Terminal illness. The donor

transfers property worth $1,000,000 to a

child in exchange for the child’s promise to

pay the donor $103,000 per year for the

donor’s life. The donor is age 60 but has been

diagnosed with an incurable illness and has

at least a 50 percent probability of dying

within 1 year. The section 7520 interest rate

for the month of the transfer is 10.6 percent,

and the standard annuity factor at that

interest rate for a person age 60 in normal

health is 7.4230. Thus, if the donor were not

terminally ill, the present value of the
63922 Federal Register / Vol. 60, No. 239 / Wednesday, December 13, 1995 / Rules and Regulations

annuity would be $764,569 ($103,000 ×

7.4230). Assuming the presumption provided

in paragraph (b)(3) of this section does not

apply, because there is at least a 50 percent

probability that the donor will die within 1

year, the standard section 7520 annuity factor

may not be used to determine the present

value of the donor’s annuity interest. Instead,

a special section 7520 annuity factor must be

computed that takes into account the

projection of the donor’s actual life

expectancy.

(5) Additional limitations. Section

7520 does not apply to the extent as

may otherwise be provided by the

Commissioner.

(c) * * * The provisions of paragraph

(b) of this section are effective with

respect to gifts made after December 13,

1995.

Michael P. Dolan,

Acting Commissioner of Internal Revenue.

Approved: October 29, 1995.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 95–30272 Filed 12–12–95; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF THE INTERIOR

Office of Surface Mining Reclamation

and Enforcement

30 CFR Part 943

[SPATS No. TX–024–FOR]

Texas Regulatory Program

AGENCY: Office of Surface Mining

Reclamation and Enforcement (OSM),

Interior.

ACTION: Final rule; approval of

amendment.

SUMMARY: OSM is approving a proposed

amendment to the Texas regulatory

program (hereinafter referred to as the

‘‘Texas program’’) under the Surface

Mining Control and Reclamation Act of

1977 (SMCRA). Texas proposed

revisions to its regulations pertaining to

self-bonding. The amendment is

intended to revise the Texas program to

be consistent with the corresponding

Federal regulations, provide additional

safeguards, and improve operational

efficiency.

EFFECTIVE DATE: December 13, 1995.

FOR FURTHER INFORMATION CONTACT:

Jack R. Carson, Acting Director, Tulsa

Field Office, Office of Surface Mining

Reclamation and Enforcement, 5100

East Skelly Drive, Suite 470, Tulsa,

Oklahoma 74135–6548, Telephone:

(918) 581–6430.

SUPPLEMENTARY INFORMATION:

I. Background on the Texas Program

II. Submission of the Proposed Amendment

III. Director’s Findings

IV. Summary and Disposition of Comments

V. Director’s Decision

VI. Procedural Determinations

I. Background on the Texas Program

On February 16, 1980, the Secretary of

the Interior conditionally approved the

Texas program. Background information

on the Texas program, including the

Secretary’s findings, the disposition of

comments, and the conditions of

approval can be found in the February

27, 1980, Federal Register (45 FR

12998). Subsequent actions concerning

the conditions of approval and program

amendments can be found at 30 CFR

943.10, 943.15, 943.16.

II. Submission of the Proposed

Amendment

By letter dated August 11, 1995

(Administrative Record No. TX–593),

Texas submitted a proposed amendment

to its program pursuant to SMCRA.

Texas submitted the proposed

amendment at its own initiative. Texas

proposed to revise 16 Texas

Administrative Code 11.221, Texas Coal

Mining Regulations (TCMR) at

subsection 806.309(j)(2)(C)(iv)

concerning alternative criteria for

acceptance of self-bonds to ensure

reclamation performance.

OSM announced receipt of the

proposed amendment in the September

12, 1995, Federal Register (60 FR

47316), and in the same document

opened the public comment period and

provided an opportunity for a public

hearing on the adequacy of the proposed

amendment. The public comment

period would have closed on October

12, 1995.

During its review of the amendment,

OSM identified a concern relating to

TCMR 806.309(j)(2)(C)(iv)(II)(C).

Specifically OSM needed clarification

on what effect, if any, Texas’ existing 25

percent net worth limitation provision

at TCMR 806.309(j)(5)(A) would have on

the proposed 162⁄3 percent net worth

limitation provision at TCMR

806.309(j)(2)(C)(iv)(II)(C). OSM notified

Texas of this concern by telephone on

September 23, 1995 (Administrative

Record No. TX–593.03).

By letter dated September 25, 1995

(Administrative Record No. TX–593.02),

Texas responded to OSM’s concern by

submitting a revision to its proposed

program amendment. Texas proposed

an additional revision to TCMR

806.309(j)(2)(C)(iv) by adding the

following clarification provision.

The limitation contained in subparagraph

(II)(C) of this section applies to applicants or

guarantors qualifying pursuant to

subparagraph (II) only and does not affect the

limitation set out in Section 806.309(j)(5)(A)

for applicants or guarantors seeking

acceptance of a self-bond pursuant to

paragraphs i–iii or subparagraph (I) of this

section.

Based upon the additional

explanatory revision to the proposed

program amendment submitted by

Texas, OSM reopened the public

comment period in the October 16,

1995, Federal Register (60 FR 53567).

The public comment period closed on

October 31, 1995.

III. Director’s Findings

Set forth below, pursuant to SMCRA

and the Federal regulations at 30 CFR

732.15 and 732.17, are the Director’s

findings concerning the proposed

amendment.

TCMR 806.309(j)(2)(C)(iv) Self-Bonding:

Requirements for a Business and

Governmental Entities, Alternative

Financial Eligibility Criteria

1. Existing State Regulation

Requirements

Like the Federal self-bonding

regulations at 30 CFR 800.23(b)(3) (i),

(ii), and (iii), Texas has standard

financial criteria for self-bonding at

§ 806.309(j)(2)(C) (i), (ii), and (iii) that

are substantively identical to the

corresponding Federal regulations.

Under the State’s standard criteria, an

applicant can qualify for self-bonding by

meeting one of three criteria that pertain

to having either a bond rating of A or

higher; or $10 million net worth and

certain financial ratio values; or having

fixed assets of $20 million and certain

financial ratio values.

To provide additional flexibility to

financially strong firms, Texas proposed

an alternative four-part test at

§ 806.309(j)(2)(C)(iv) that was approved

by OSM on February 19, 1992, as an

alternative test under the Texas selfbonding program (57 FR 5983). Texas’

alternative test allows an applicant to

qualify if it meets four criteria in

combination. Specifically, an applicant

applying for self-bonding under

§ 806.309(j)(2)(C)(iv) must have an

investment-grade bond rating

(§ 806.309(j)(2)(C)(iv)(I)); tangible net

worth of at least $10 million and fixed

assets in the United States of $20

million (§ 806.309(j)(2)(C)(iv)(II)); a ratio

of total liabilities to net worth that is

equal to or less than the industry

median (§ 806.309(j)(2)(C)(iv)(III)); and a

ratio of current assets to current

liabilities that is equal to or greater than

the industry median or a current credit