The Tax Lawyer
Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.

A Foolish Inconsistency? The Differential Treatment of Recurring Obligations in Treasury Regulation Sections 20.2053-1 and 20.2053-4

Sarah Grandfield

I. Introduction
In October 2009, the Treasury Department issued final regulations pertaining to amounts deductible from a decedent’s gross estate for certain expenses and indebtedness, as described in section 2053(a)(3) of the Code. According to the regulations’ preamble, the new rules will “primarily affect estates of decedents against which there are claims outstanding at the time of the decedent’s death.” The regulations were designed to resolve a circuit split over whether an estate should be entitled to deduct a “snapshot” valuation of claims outstanding on the date of the decedent’s death, or alternatively to deduct only the amounts that the estate actually pays, as it pays them, to satisfy claims against it. The final regulations, which apply to any individual dying after October 19, 2009, take the latter course, generally providing that a deduction under section 2053(a) will be allowed only for amounts actually paid by the estate.

However, the final regulations do not resolve an important issue: whether or not an exception to the “actually paid” rule will apply to noncontingent obligations to make recurring payments (for example, payments owed under litigation settlements or post-divorce property settlements). The Service’s proposed regulations, published two years before adoption of the final regulations, would have required that such amounts be deducted with a discount to present value on the estate tax return. But during the public comment period, commentators expressed concern that only allowing discounted-value deductions would result in inconsistent and unfair treatment of noncontingent obligations as compared to contingent obligations, which, under both the proposed and final regulations, give rise only to “dollar for dollar” deductions as payments are made. This argument was somewhat availing: the reference to present-value discounting was dropped from the final regulations’ treatment of noncontingent obligations and replaced with language indicating that such obligations are to be deducted at their full future value. However, the Service reserved one subsection of the regulations with the stated intention of providing guidance sometime in the future as to the “appropriate use of present value” in ascertaining deductible amounts.

This Comment argues that the executor of an estate facing noncontingent recurring obligations should be allowed to elect between (1) taking a deduction at the present discounted value of future payments, or (2) waiting until payment is actually made before recovering the value of each deduction.9 Part II describes the mechanics of section 2053(a)(3) and summarizes its case law history, explaining how this history contributed to the development of the new Treasury regulations. Part III summarizes the enacted provisions that apply to deductions for claims against an estate. Part IV examines more closely the controversy surrounding the treatment of noncontingent recurring obligations. Part V analyzes the benefits and drawbacks of using an election as a solution to the conflict, and concludes that allowing an election is an appropriate solution given the demands of equity and broader goals of the Code provisions.

Published by
Section of Taxation,
American Bar Association
in Collaboration with the
Georgetown University Law Center

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