IRS Amends QTIP Regs To Reflect Adverse Court Decisions

 [4830-01-u]

[2] ACTION: Temporary regulations.

[3] SUMMARY: This document contains temporary regulations amending the final estate tax marital deduction regulations. The amendments are made to conform the estate tax regulations to recent court decisions. The amendments affect estates of decedents electing the marital deduction for qualified terminable interest property (QTIP) and the estates of the surviving spouses of such decedents. The text of these temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section of this issue of the Federal Register.

[4] DATES: These regulations are effective February 18, 1997.

[5] For dates of applicability of these regulations, see Effective Date under SUPPLEMENTARY INFORMATION.

[6] FOR FURTHER INFORMATION CONTACT: Susan B. Hurwitz at (202) 622-3090 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND

[7] On March 1, 1994, the IRS published final Estate and Gift Tax Regulations (26 CFR part 20 and part 25) under sections 2044, 2056, 2207A, 2519, 2523, and 6019 of the Internal Revenue Code (Code) in the Federal Register (59 FR 9642). At the time the regulations were published, the position contained in section 20.2056(b)-7(d)(3) was the subject of litigation in a number of cases and had been rejected by two circuit courts in Estate of Clayton v. Commissioner, 976 F.2d 1486 (5th Cir. 1992), rev'g 97 T.C. 327 (1991), and Estate of Robertson v. Commissioner, 15 F.3d 779 (8th Cir. 1994), rev'g 98 T.C. 678 (1992). Since that time, Estate of Spencer v. Commissioner, 43 F.3d 226 (6th Cir. 1995), rev'g T.C. Memo.1 1992-579, also rejecting the IRS position, has been decided. Additionally, in Estate of Clack v. Commissioner, 106 T.C. 131 (1996), the Tax Court reversed the position it had taken previously in Estate of Clayton, Estate of Robertson, and Estate of Spencer. This temporary regulation amends the final regulations in accordance with the circuit courts' decisions in Estate of Clayton, Estate of Robertson, and Estate of Spencer, and the Tax Court's decision in Estate of Clack.

EXPLANATION OF PROVISIONS

[8] Section 20.2056(b)-7T(d)(3)(ii) has been added. As a result of the addition, an income interest (or life estate) that is contingent upon the executor's election under section 2056(b)(7)(B)(v) will not be precluded, on that basis, from qualification as a "qualifying income interest for life" within the meaning of section 2056(b)(7)(B)(ii).

[9] In accordance with the addition of section 20.2056(b)- 7T(d)(3)(ii), section 20.2056(b)-7T(h) EXAMPLE 6(ii) and section 20.2044-1T EXAMPLE 8 are added.

EFFECTIVE DATE

[10] These regulations are effective in the case of estates of decedents whose estate tax returns are due after February 18, 1997.

SPECIAL ANALYSES

[11] 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 has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and, because these regulations do not impose on small entities a collection of information requirement, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

[12] The principal author of these regulations is Susan B. Hurwitz, Office of Assistant Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and Treasury Department participated in their development.

LIST OF SUBJECTS IN 26 CFR PART 20

[13] Estate taxes, Reporting and recordkeeping requirements.

ADOPTION OF AMENDMENTS TO THE REGULATIONS

[14] Accordingly, 26 CFR part 20 is amended as follows:

PART 20 -- ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16, 1954

Paragraph 1. The authority citation for part 20 continues to read in part as follows:

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

Par. 2. Section 20.2044-1T is added to read as follows:

SECTION 20.2044-1T CERTAIN PROPERTY FOR WHICH MARITAL DEDUCTION WAS PREVIOUSLY ALLOWED (TEMPORARY).

(a) through (d). [Reserved]. For further guidance, see section 20.2044-1(a) through (d).

(e) EXAMPLES. [Reserved]. For further guidance, see section 20.2044-1(e).

EXAMPLE 1 through EXAMPLE 7. [Reserved]. For further guidance, see section 20.2044-1(e) EXAMPLE 1 through EXAMPLE 7.

 EXAMPLE 8. INCLUSION OF TRUST PROPERTY WHEN SURVIVING

SECTION 20.2056(b)-7T ELECTION WITH RESPECT TO LIFE ESTATE FOR SURVIVING SPOUSE (TEMPORARY).

(a) through (d)(2) [Reserved]. For further guidance, see section 20.2056(b)-7(a) through (d)(2).

(d)(3) CONTINGENT INCOME INTERESTS. (i) [Reserved]. For further guidance, see section 20.2056(b)-7(d)(3).

(ii) An income interest for a term of years, or a life estate subject to termination upon the occurrence of a specified event (e.g., remarriage), is not a qualifying income interest for life. However, an income interest for life (or life estate) that is contingent upon the executor's election under section 2056(b)(7)(B)(v) will not, on that basis, fail to be a qualifying income interest for life. This paragraph (d)(3)(ii) applies with respect to estates of decedents whose estate tax returns are due after February 18, 1997.

(d)(4) through (g) [Reserved]. For further guidance see section 20.2056(b)-7(d)(4) through (g).

(h) EXAMPLES. [Reserved]. See section 20.2056(b)-7(h).

EXAMPLE 1 through EXAMPLE 5. [Reserved]. For further guidance, see section 20.2056(b)-7(h) EXAMPLE 1 through EXAMPLE 5.

 EXAMPLE 6. (i) (Reserved]. For further guidance, see

SECTION 20.2056(b)-10T EFFECTIVE DATES (TEMPORARY).

In addition to the effective dates set out in section 20.2056(b)-10, section 20.2056(b)-7T(d)(3)(ii) is effective with respect to estates of decedents dying after March 1, 1994. For further guidance, see section 20.2056(b)-10.