Guidance Under Section 2053 Regarding Post-Death Events, 53652-53665 [E9-25138]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 74, Number 201 (Tuesday, October 20, 2009)]
[Rules and Regulations]
[Pages 53652-53665]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-25138]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 20

[TD 9468]
RIN 1545-BC56


Guidance Under Section 2053 Regarding Post-Death Events

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to the 
amount deductible from a decedent's gross estate for claims against the 
estate under section 2053(a)(3) of the Internal Revenue Code (Code). In 
addition, the regulations update the provisions relating to the 
deduction for certain state death taxes to reflect the statutory 
amendments made in 2001 to sections 2053(d) and 2058. The regulations 
primarily will affect estates of decedents against which there are 
claims outstanding at the time of the decedent's death.

DATES: Effective Date: The regulations are effective on October 20, 
2009.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
20.2051-1(c), 20.2053-1(f), 20.2053-3(e), 20.2053-4(f), 20.2053-6(h), 
20.2053-9(f), and 20.2053-10(e).

FOR FURTHER INFORMATION CONTACT: Karlene M. Lesho, (202) 622-3090 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Section 2001 of the Code imposes a tax on the transfer of the 
taxable estate, determined as provided in section 2051, of every 
decedent, citizen, or resident of the United States. Section 2031(a) 
generally provides that the value of the decedent's gross estate shall 
include the value at the time of decedent's death of all property, real 
or personal, tangible or intangible, wherever situated. Section 2051 
provides that the value of the taxable estate is determined by 
deducting from the value of the gross estate the deductions provided 
for in sections 2051 through 2058. Pursuant to section 2053(a), ``the 
value of the taxable estate shall be determined by deducting from the 
value of the gross estate such amounts: (1) For funeral expenses, (2) 
for administration expenses, (3) for claims against the estate, and (4) 
for 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, as are allowable by the laws of the jurisdiction, whether 
within or without the United States, under which the estate is being 
administered.''
    The amount an estate may deduct for claims against the estate has 
been a highly litigious issue. See the Background in the notice of 
proposed rulemaking published in the Federal Register on April 23, 2007 
(REG-143316-03, 72 FR 20080). Unlike section 2031, section 2053(a) does 
not contain a specific directive to value a deductible claim at its 
value at the time of the decedent's death. Section 2053 specifically 
contemplates expenses such

[[Page 53653]]

as funeral and administration expenses, which are only determinable 
after the decedent's death.
    The lack of consistency in the case law has resulted in different 
estate tax treatment of estates that are similarly situated, depending 
only upon the jurisdiction in which the executor resides. The Treasury 
Department and the IRS believe that similarly-situated estates should 
be treated consistently by having section 2053(a)(3) construed and 
applied in the same way in all jurisdictions.
    Accordingly, in an effort to further the goal of effective and fair 
administration of the tax laws, the Treasury Department and the IRS 
published proposed regulations in the Federal Register on April 23, 
2007. In formulating the proposed rule, the Treasury Department and the 
IRS carefully considered: The statutory framework and legislative 
history of section 2053 and its predecessors; the existing regulatory 
provisions under section 2053, particularly those that are generally 
applicable to all amounts deductible under section 2053; the numerous 
judicial decisions involving an issue under section 2053(a)(3) and the 
analysis and conclusion in each; and, the practical consequences of 
various possible alternatives for determining the amount deductible 
under section 2053(a)(3).
    The proposed regulations proposed amendments to the regulations 
under section 2053 to clarify that events occurring after a decedent's 
death are to be considered when determining the amount deductible under 
all provisions of section 2053 and that deductions under section 2053 
generally are limited to amounts actually paid by the estate in 
satisfaction of deductible expenses and claims. The proposed 
regulations also proposed amendments to address more specifically 
issues involving final court decisions, settlements, protective claims, 
reimbursed amounts, claims that are potential, unmatured, or contested, 
claims involving multiple defendants, claims by a family member or 
beneficiary of a decedent's estate, unenforceable claims, recurring 
payments, and the changes made to section 2053(d) in 2001.
    Written comments were received on the proposed regulations and a 
public hearing was held on August 6, 2007. After careful consideration 
of the written and oral comments, the proposed regulations are adopted 
as revised by this Treasury decision. In addition, the Treasury 
Department and the IRS plan to issue additional guidance, including 
additional proposed regulations, in order to respond to certain 
comments and emerging issues that the Treasury Department and the IRS 
believe merit further consideration, as indicated in the Summary.
    The comments and revisions to the proposed regulations are 
discussed in this preamble.

Summary of Comments and Explanation of Revisions

1. Comments Relating to Prop. Reg. Sec.  20.2051-1

    One commentator suggested that the sentence relating to the 
computation of the taxable estate of a decedent who was not a citizen 
or resident of the United States should continue to reference the 
regulations under section 2106, and not the regulations under section 
2051. The final regulations restore the reference to the regulations 
under section 2106.

2. Comments Relating to the Standard for Deductibility Set Forth in the 
Proposed Regulation

    The proposed regulations generally provide that only claims 
actually paid by the estate may be deducted under section 2053(a)(3). 
Many commentators disagreed with this approach and suggested that 
claims against a decedent's estate be valued on the basis of what was 
reasonably known on the date of the decedent's death. These 
commentators cited the line of cases following the decision in Ithaca 
Trust v. Commissioner, 279 U.S. 151 (1929), to support the same 
valuation rule for both claims against the estate and claims for 
inclusion purposes under section 2031. Commentators were concerned that 
the approach of the proposed regulations could lengthen the process of 
estate administration (on account of the anticipated increase in the 
need for protective claims), cause tax motivations to factor into 
litigation strategy, and produce liquidity shortfalls in estates with 
both claims by and claims against a decedent. The divergence of court 
opinions on this issue is evidence that the proper way to deduct claims 
against an estate is a very difficult issue. After giving serious 
consideration to the comments submitted on this issue, the Treasury 
Department and the IRS continue to believe that a deduction for claims 
under section 2053(a)(3) only for amounts actually paid by the estate 
most closely aligns with the legislative intent behind section 2053 and 
its predecessors and best furthers the goal of effective and fair 
administration of the tax laws. Accordingly, the final regulations 
generally maintain the approach of the proposed regulations.
    Notwithstanding the adherence to the general approach of the 
proposed regulations, however, the Treasury Department and the IRS 
acknowledge that, as was pointed out in many of the comments, there are 
practical difficulties associated with each of the alternatives, 
including the approach taken in the proposed regulations. In order to 
make the practical application of the approach more administrable, the 
final regulations include several exceptions to the approach of the 
proposed regulations. The final regulations include an exception for 
claims against the estate with respect to which there is an asset or 
claim includible in the gross estate that is substantially related to 
the claim against the estate. See paragraph 10 of this ``Summary of 
Comments and Explanation of Revisions'' and Sec.  20.2053-4(b). The 
final regulations also include an exception for claims against the 
estate that, collectively, do not exceed $500,000 (not including those 
deductible as ascertainable amounts). See paragraph 5 of this ``Summary 
of Comments and Explanation of Revisions'' and Sec.  20.2053-4(c). 
Although both exceptions provide an opportunity to claim a deduction at 
the time of filing the United States Estate (and Generation-Skipping 
Transfer) Tax Return (Form 706), in each case, the amount of the 
deduction is subject to adjustment to reflect post-death events, 
consistent with the general approach of the regulations.

3. Comments Relating to the Effect of a Court Decree in Prop. Reg. 
Sec.  20.2053-1(b)(2)

    The proposed regulations changed the language regarding a court 
decree from ``the court passes upon the facts upon which deductibility 
depends'' to ``the court reviewed the facts relating to the 
expenditures.'' A commentator suggested that such a change in language 
may give the unintended impression that this constitutes a substantive 
change. Thus, these final regulations remove the language of the 
proposed regulations and reinstate the original language.
    A commentator also requested that an example be added to clarify 
that the last sentence of Prop. Reg. Sec.  20.2053-1(b)(2)(i) would 
apply to jurisdictions in which a court approves the administration of 
an estate without specifically approving expenses and claims, absent a 
challenge from an interested party. The final regulations include such 
an example.
    Some commentators recommended the removal of the requirement that a

[[Page 53654]]

settlement be within the range of reasonable outcomes under applicable 
state law in order for a settlement amount to be deductible because the 
requirement places the Commissioner or a court in the position of 
having to evaluate the legal merits of a claim adjudicated in another 
court proceeding. The commentators also maintained that the requirement 
is superfluous in light of the existing requirements that the 
settlement resolve a bona fide issue in an active and genuine contest 
and that adverse parties negotiate at arm's length. The final 
regulations eliminate the separate requirement that the settlement be 
within the range of reasonable outcomes under applicable state law.
    Some commentators claimed that the rules relating to settlements 
did not recognize that, in some instances, the cost of defending a 
claim and the delay associated with litigating the claim will factor 
into the decision to settle a claim. The final regulations clarify that 
a deduction will not be denied for a settlement amount otherwise 
deductible under section 2053 if an estate can establish that the cost 
of defending the claim or contesting the expense, the delay associated 
with litigating such claim or expense, or another significant factor 
will impose a higher burden on the estate relative to the amount paid 
to settle the claim or the contested expense.

4. Comments Relating to the Rule for Estimated Amounts in Prop. Reg. 
Sec.  20.2053-1(b)(4)

    The rule provided in Prop. Reg. Sec.  20.2053-1(b)(4) involving 
estimated amounts is now provided in Sec.  20.2053-1(d)(4) of these 
final regulations and the paragraph heading is changed from 
``[e]stimated amounts'' to ``[e]xception for certain ascertainable 
amounts.'' The final regulations use a consistent description of the 
rule contained in Sec.  20.2053-1(d)(4) where applicable in the 
remainder of the regulation. No substantive change is intended; rather, 
the modified paragraph heading in the final regulations is intended to 
describe the substance of the rule more accurately.
    A commentator noted that use of the language ``will be paid'' in 
Prop. Reg. Sec.  20.2053-1(b)(4) may be inconsistent with the language 
in Prop. Reg. Sec.  20.2053-3(b)(1) (``may reasonably be expected to be 
paid'') and in Prop. Reg. Sec.  20.2053-4(b)(7)(i) (claims cannot be 
estimated if there is ``reasonable likelihood that full satisfaction of 
the liability will not be made''). The commentator suggested 
modification of the language in Prop. Reg. Sec.  20.2053-1(b)(4) to 
incorporate the reasonableness standard found in the other sections and 
requested conforming changes throughout the regulation for consistency 
purposes. The final regulations do not add a reasonableness component 
to the standard for meeting the ``will be paid'' requirement, although 
the final regulations clarify that a deduction is allowed under the 
rule for deducting certain ascertainable amounts to the extent that the 
Commissioner is reasonably satisfied that the amount to be paid is 
ascertainable with reasonable certainty and will be paid. The final 
regulations use consistent language where applicable in describing the 
standard for meeting the ``will be paid'' requirement in each reference 
to the rule for deducting certain ascertainable amounts.
    In addition, some commentators requested clarification on whether 
the rule previously provided in Prop. Reg. Sec.  20.2053-1(b)(4) 
applies not only to claims but to administration expenses as well. The 
final regulations make the requested clarification and Sec.  20.2053-
1(d)(4) provides that the rule for deducting certain ascertainable 
amounts applies to both a claim and an expense.
    A commentator suggested that the statement in Prop. Reg. Sec.  
20.2053-1(b)(4) prohibiting a deduction for ``a vague or uncertain 
estimate'' be omitted because it puts forth a subjective standard open 
to a wide range of interpretations. The Treasury Department and the IRS 
believe that the rule previously provided in Prop. Reg. Sec.  20.2053-
1(b)(4), now provided in Sec.  20.2053-1(d)(4) of these final 
regulations, sets forth clear requirements for determining the amount 
allowable as a deduction under section 2053. Because the statement in 
Prop. Reg. Sec.  20.2053-1(b)(4) merely clarifies this rule, the 
statement has been retained in the final regulations.
    A commentator suggested that the language in Prop. Reg. Sec.  
20.2053-1(b)(4), indicating that a deduction in advance of payment will 
be disallowed if the payment is thereafter waived or otherwise left 
unpaid, negates the purpose of allowing a deduction for an estimated 
amount and should be deleted. However, the Treasury Department and the 
IRS believe that there is an important difference. The rule for 
deducting certain ascertainable amounts previously provided in Prop. 
Reg. Sec.  20.2053-1(b)(4), and now provided in Sec.  20.2053-1(d)(4) 
of these final regulations, provides an estate with the opportunity to 
claim a deduction at the time of filing Form 706, even though the 
amount ultimately allowable as a deduction under this rule will take 
into account events occurring after the date of a decedent's death. The 
ability to deduct an ascertainable amount does not change the general 
rule that the amount of the deduction is to reflect post-death events.
    Some commentators questioned whether the proposed regulations 
impose a duty on the executor to report amounts that were claimed as 
deductions on the estate tax return, but were subsequently not paid or 
not paid in full, and whether such a duty could be enforced after the 
period of limitations on assessment has expired. The Treasury 
Department and the IRS did not intend for the proposed regulations to 
impose a duty on the executor that could be enforced after the 
expiration of the period of limitations on assessment. As a result, the 
final regulations eliminate this provision. The final regulations also 
include a provision clarifying the period during which post-death 
events will be considered.

5. Comments Relating to Protective Claims

    A commentator expressed concern that the protective claim 
procedures in the proposed regulations would result in increased 
administrative costs and a delay in the administration of the estate 
because filing a protective claim effectively would keep the period of 
limitations open to the extent of the amount of the claim for refund. 
The Treasury Department and the IRS believe that protective claims for 
refund are an appropriate and necessary component of these regulations, 
as they provide a mechanism to ensure that the deductibility rule 
provided for in these regulations is implemented in a fair and 
equitable manner. Nevertheless, the Treasury Department and the IRS 
acknowledge that the commentator's concern is valid. In an effort to 
make the regulation more administrable for both taxpayers and the 
Commissioner, the final regulations in Sec.  20.2053-4(c) include an 
exception for claims against the estate that do not exceed, in the 
aggregate, $500,000. Because the purpose of this provision is to 
provide certain relief from the need to file a protective claim, a 
claim is not eligible for this provision unless the entire amount of 
the claim may be covered within this cap. This rule allows an estate a 
deduction on Form 706 for claims against the estate. However, 
consistent with the general approach of the final regulations, the 
amount of the deduction is subject to adjustment to reflect post-death 
events. To address the commentator's concern regarding the

[[Page 53655]]

effect of a protective claim for refund on the applicable period of 
limitations, the Treasury Department and the IRS are issuing, 
concurrent with this regulation, a Notice announcing the IRS's decision 
to limit the review of a return, in certain circumstances, when a 
timely-filed claim for refund of estate taxes that is based on a 
deduction under section 2053 ripens after the expiration of the 
limitations period on assessment.
    Some commentators requested more detailed guidance on the 
procedures for filing a protective claim for refund. In response to 
this comment, the final regulations include a provision under Sec.  
20.2053-1(d)(5) to explain the protective claim for refund process. The 
Treasury Department and the IRS also intend to provide, by publication 
in the Internal Revenue Bulletin, further procedural guidance on 
protective claims for refund due to section 2053 claims or expenses. In 
addition, a commentator suggested that Form 706 be revised to 
incorporate a protective claim for refund so that a separate form need 
not be filed. The Treasury Department and the IRS believe this 
suggestion will make the final regulations more administrable and are 
contemplating amending Form 706 to implement this suggestion.
    Another commentator suggested that the IRS be lenient in granting 
extensions of time to pay the estate tax under section 6161 when an 
estate is confronting a liquidity issue arising from the inability to 
deduct a claim that is the subject of a protective claim for refund. 
Although in many cases the illiquidity resulting from a not-yet-
deductible claim may be reasonable cause for granting an extension of 
time to pay the estate tax for purposes of section 6161, the Treasury 
Department and the IRS believe that any regulatory provision 
implementing this suggestion would be outside the scope of this 
regulation.

6. Comments Relating to the Effect on the Marital and Charitable 
Deductions

    Some commentators requested clarification of the impact of the 
approach taken in the proposed regulations on the marital and 
charitable deductions in estates where a claim or expense is payable in 
whole or in part from a bequest that qualifies for the marital or 
charitable deduction. Commentators requested that the final regulations 
include a rule confirming that, if a claim or expense is the subject of 
a protective claim for refund under section 2053 and is payable out of 
a fund that meets the requirements for a charitable or marital 
deduction under section 2055 or 2056, respectively, the charitable or 
marital deduction will not be reduced by the amount of the claim or 
expense until the amount is actually paid. In the interest of enhancing 
the administrability of these regulations, such a rule is included in 
Sec.  20.2053-1(d)(5)(ii). The Treasury Department and the IRS view 
this rule as similar to the rules in the regulations under sections 
2055 and 2056 that provide, respectively, for the reduction of the 
value of the charitable or marital share by the amount of estate 
transmission expenses paid from the charitable or marital share. For 
purposes of the estate tax charitable deduction under section 2055, a 
claim or expense that is the subject of a protective claim for refund 
under section 2053 will not render the charitable deduction, to the 
extent of the amount of that claim or expense, contingent and thus 
nondeductible under section 2055.

7. Comments Relating to Reimbursements, Prop. Reg. Sec.  20.2053-
1(b)(3)

    The proposed regulations provide that a deduction is not allowed to 
the extent that the expense or claim is or could be compensated for by 
insurance or is or could be otherwise reimbursed. A commentator 
recommended that the final regulations explain the method by which an 
executor may establish that there is no available reimbursement either 
from another party or insurance. In response to this comment, the final 
regulations provide that an executor may certify on Form 706 that no 
reimbursement is available for a claim or expense if the executor 
neither knows nor reasonably should have known of the availability of 
any such reimbursement.
    Additionally, some commentators recommended that the final 
regulations reflect the possibility that the cost of obtaining the 
reimbursement might outweigh the benefit of reimbursement. In response, 
the final regulations provide that an executor need not reduce the 
amount of a claim or expense deductible under section 2053 by the 
amount of a potential reimbursement if the executor provides a 
reasonable explanation on Form 706 for his or her reasonable 
determination that the burden of necessary collection efforts would 
outweigh the anticipated benefits from those efforts.

8. Comments Relating to Deduction for Expenses of Administering Estate 
Under Prop. Reg. Sec.  20.2053-3

    A commentator recommended removing from Prop. Reg. Sec.  20.2053-
3(b) and (c) any language restating the general requirements for 
deductibility set forth in Prop. Reg. Sec.  20.2053-1 and the general 
rules regarding protective claims. The commentator suggested that 
duplicating the language in Prop. Reg. Sec.  20.2053-3(b) and (c) was 
unnecessary and perhaps confusing. In response, the final regulations 
remove the language that merely restates the general rules set forth in 
Prop. Reg. Sec.  20.2053-1.
    Some commentators recommended omitting the sentence in Prop. Reg. 
Sec.  20.2053-3(d)(3) that prohibits a deduction for expenses incurred 
merely for the purpose of unreasonably extending the time for payment, 
or incurred other than in good faith. The commentators stated that a 
situation where litigation has been intentionally prolonged other than 
in good faith is rare and unlikely to occur. Furthermore, the 
commentators expressed concern that the rule may subject the estate's 
legal strategy to IRS inquiry. Finally, the commentators maintained 
that it would be extremely difficult to prove that litigation expenses 
have not been incurred to unreasonably extend the time for payment or 
other than in good faith. The Treasury Department and the IRS find 
these comments persuasive and additionally believe that including this 
sentence in the final regulations is not necessary because expenses 
incurred merely for the purpose of unreasonably extending the time for 
payment or other than in good faith will not be considered actually and 
necessarily incurred in the administration of the decedent's estate 
and, therefore, are not deductible for that reason.

9. Comments Relating to Claims Against the Estate, Prop. Reg. Sec.  
20.2053-4(a)

    The proposed regulations provide that deductible claims against a 
decedent's estate are limited to legitimate and bona fide claims. A 
commentator stated that the terms ``legitimate'' and ``bona fide'' in 
Prop. Reg. Sec.  20.2053-4(a)(1) are redundant. The final regulations 
remove the term ``legitimate'' and provide that deductible claims 
against a decedent's estate are limited to bona fide claims.
    A commentator requested clarification that the Commissioner shall 
be bound in the same manner as the estate to consider events occurring 
after the date of a decedent's death when determining the amount 
deductible by the decedent's estate. The Treasury Department and the 
IRS believe that the rule of Prop. Reg. Sec.  20.2053-4(a)(2) sets 
forth a general principle that governs the determination of the amount 
deductible against a decedent's estate, and that therefore is binding 
on both estates and the Commissioner. Accordingly, no change is 
believed to be necessary.

[[Page 53656]]

10. Comments Relating to Claims and Counterclaims

    Some commentators, citing fairness and liquidity concerns, 
suggested allowing a deduction for a claim against the estate on the 
initial filing of Form 706 if the value of the gross estate includes a 
claim in the same or a substantially-related matter or includes an 
asset integrally related or subject to the claim against the estate. 
The Treasury Department and the IRS find this suggestion persuasive 
when a decedent's substantially-related claim against a third party or 
a decedent's integrally-related asset constitutes a significant 
percentage of the gross estate. The final regulations under Sec.  
20.2053-4(b) provide that the current value of a claim against the 
estate with respect to which there is one or more substantially-related 
claims or integrally-related assets that are included in a decedent's 
gross estate may be deducted on Form 706, provided that the related 
claim or asset of the estate constitutes at least 10 percent of the 
decedent's gross estate, the value of each such claim against the 
estate is determined from a ``qualified appraisal'' performed by a 
``qualified appraiser'' (within the meaning of section 170 of the Code 
and the corresponding regulations), and the value of each such claim 
against the estate is subject to adjustment to reflect post-death 
events. The deductible amount of each such claim is limited to the 
value of the related asset or claim included in the gross estate. The 
amount of the claim against the estate in excess of this limitation may 
be the subject of a protective claim for refund.

11. Comments Relating to Prop. Reg. Sec.  20.2053-4(b)(4), Claims by 
Family Members, Related Entities, or Beneficiaries

    The proposed regulations include a rebuttable presumption that 
claims by a family member of the decedent, a related entity, or a 
beneficiary of the decedent's estate or a revocable trust are not 
legitimate and bona fide. Many commentators requested that the 
rebuttable presumption be removed from the regulation. A commentator 
suggested that the presumption be replaced by a provision requiring 
close scrutiny of claims by family members, related entities, or 
beneficiaries. Although such claims are in fact closely scrutinized 
during the examination of a return, the Treasury Department and the IRS 
believe that a regulatory provision prescribing the level of scrutiny 
to be given a particular item is not appropriate for this regulation.
    Other commentators stated that the presumption is inconsistent with 
the burden of proof provision of section 7491 and that such a 
presumption should apply only when the facts indicate possible 
collusion. After careful consideration, the Treasury Department and the 
IRS have concluded that the rebuttable presumption in the proposed 
regulations does not conflict with section 7491.
    Some commentators maintained that the presumption is unfair and 
unwarranted because the proposed regulations and the burden of proof 
provisions adequately deter the manipulation of claims by family 
members, related entities or beneficiaries. The Treasury Department and 
the IRS carefully considered these comments and, in response to the 
enumerated concerns with the creation of a rebuttable presumption, have 
removed the presumption from the final regulations. Instead, the final 
regulations continue to include the generally applicable requirement 
that any claim or expense deductible under section 2053 must be bona 
fide in nature, but also include a paragraph that (as suggested by a 
commentator) provides a nonexclusive list of factors indicative of the 
bona fide nature of a claim or expense involving a family member, 
related entity, or beneficiary of the estate of a decedent.

12. Comments Relating to Payments in Prop. Reg. Sec.  20.2053-4(b)(5)

    A commentator suggested removing the rule in Prop. Reg. Sec.  
20.2053-4(b)(5) providing that claims that are unenforceable prior to 
or at the decedent's death are not deductible even if paid. The 
Treasury Department and the IRS believe that this rule is mandated by 
the statutory requirement that only amounts allowable by the laws of 
the jurisdiction under which the estate is being administered may be 
deducted from the value of the gross estate. Therefore, this suggestion 
has not been adopted.

13. Comments Relating to Recurring Payments in Prop. Reg. Sec.  
20.2053-4(b)(7)

    The proposed regulations provide that certain recurring, 
noncontingent obligations may be deducted as estimated amounts. Some 
commentators suggested that not allowing an estate to deduct the value 
of a contingent obligation is inefficient and inequitable because it 
forces the estate to remain open unless the estate purchases a 
commercial annuity. The Treasury Department and the IRS acknowledge 
that a contingent obligation may extend the period of estate 
administration unless the estate purchases a commercial annuity to 
satisfy the obligation or makes distributions that are encumbered by 
the contingent obligation. However, the Treasury Department and the IRS 
believe that allowing a deduction for a noncontingent recurring payment 
as an ascertainable amount (deductible under Sec.  20.2053-1(d)(4) of 
the final regulations), but not allowing a deduction for a contingent 
recurring payment until paid is a necessary component of the rules of 
deductibility provided for in these regulations. Nevertheless, the 
Treasury Department and the IRS believe that the purchase of a 
commercial annuity (with a cost determined by the market and based on 
the particular contingency) to fund a contingent obligation should be 
deemed to be substantially equivalent to a reasonably ascertainable 
(and thus deductible) noncontingent obligation for purposes of section 
2053 and these regulations.
    Some commentators requested clarification on whether death or 
remarriage is considered a contingency with respect to decedent's 
obligation to make a recurring payment. The final regulations clarify 
that, for purposes of section 2053, an obligation subject to death or 
remarriage is treated as a noncontingent obligation under Sec.  
20.2053-4(d)(6)(i).
    Some commentators suggested that the disparate treatment afforded 
noncontingent obligations (deduction for present value of obligations) 
versus contingent obligations (dollar-for-dollar deduction as paid) is 
inequitable and produces an inconsistent result without meaningful 
justification. These commentators requested that the final regulations 
allow an estate to choose between deducting the present value of a 
noncontingent recurring payment on the estate tax return, or instead 
deducting the amounts paid in the same manner as provided for a 
contingent obligation (after filing an appropriate protective claim for 
refund). The Treasury Department and the IRS find the arguments against 
the disparate treatment of noncontingent and contingent obligations to 
be persuasive. The final regulations eliminate the disparate treatment 
by removing the present value limitation applicable only to 
noncontingent recurring payments. The Treasury Department and the IRS 
believe that the issue of the appropriate use of present value in 
determining the amount of the deduction allowable under section 2053 
merits further consideration. The final regulations

[[Page 53657]]

reserve Sec.  20.2053-1(d)(6) to provide future guidance on this issue.
    A commentator requested clarification on whether the rule in Prop. 
Reg. Sec.  20.2053-4(b)(7) will or will not apply to mortgages and 
other indebtedness under a note. The final regulations clarify that the 
rules applicable to recurring payments do not apply to payments made in 
connection with a mortgage or other indebtedness described in Sec.  
20.2053-7.
    Finally, a commentator requested further guidance on the commercial 
annuity provision; specifically, whether the executor must transfer 
ownership of the purchased annuity to the creditor or to a third party 
who will use the annuity to make payments to the creditor, or whether 
granting the creditor a security interest in the annuity is sufficient 
in order for the amount paid for the annuity to be deductible under 
section 2053. For income tax purposes, the transfer of the annuity is 
likely to cause immediate gain recognition of the entire amount to the 
transferee unless the annuity meets several specific requirements. In 
light of the purpose and intent of these regulations, the Treasury 
Department and the IRS believe that the purchase of a commercial 
annuity, and the nonrefundable and generally significant costs involved 
in that purchase, should be sufficient to permit a deduction of the 
cost of the annuity for purposes of section 2053. For these reasons, 
the final regulations clarify that the estate may be permitted to own 
the annuity.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 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 a collection of information on small 
entities, 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 Code, this regulation has been 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Drafting Information

    The principal author of these regulations is Karlene M. Lesho, 
Office of the Associate Chief Counsel (Passthroughs and Special 
Industries). Other personnel from the IRS and the Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 20

    Estate taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 20 is amended 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 20.2051-1 is revised to read as follows:


Sec.  20.2051-1  Definition of taxable estate.

    (a) General rule. The taxable estate of a decedent who was a 
citizen or resident (see Sec.  20.0-1(b)(1)) of the United States at 
death is determined by subtracting the total amount of the deductions 
authorized by sections 2053 through 2058 from the total amount which 
must be included in the gross estate under sections 2031 through 2044. 
These deductions are in general as follows--
    (1) Funeral and administration expenses and claims against the 
estate (including certain taxes and charitable pledges) (section 2053).
    (2) Losses from casualty or theft during the administration of the 
estate (section 2054).
    (3) Charitable transfers (section 2055).
    (4) The marital deduction (section 2056).
    (5) Qualified domestic trusts (section 2056A).
    (6) Family-owned business interests (section 2057) to the extent 
applicable to estates of decedents.
    (7) State death taxes (section 2058) to the extent applicable to 
estates of decedents.
    (b) Special rules. See section 2106 and the corresponding 
regulations for special rules regarding the computation of the taxable 
estate of a decedent who was not a citizen or resident of the United 
States. See also Sec.  1.642(g)-1 of this chapter concerning the 
disallowance for income tax purposes of certain deductions allowed for 
estate tax purposes.
    (c) Effective/applicability date. This section applies to the 
estates of decedents dying on or after October 20, 2009.

0
Par. 3. Section 20.2053-1 is amended by:
0
1. Revising paragraphs (a), (b)(2), (b)(3), and adding paragraph 
(b)(4).
0
2. Redesignating paragraph (d) as paragraph (e).
0
3. Adding paragraphs (d) and (f).
    The revisions and additions read as follows:


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

    (a) General rule. In determining the taxable estate of a decedent 
who was a citizen or resident of the United States at death, there are 
allowed as deductions under section 2053(a) and (b) amounts falling 
within the following two categories (subject to the limitations 
contained in this section and in Sec. Sec.  20.2053-2 through 20.2053-
10)--
* * * * *
    (b) * * *
    (2) Bona fide requirement--(i) In general. Amounts allowed as 
deductions under section 2053(a) and (b) must be expenses and claims 
that are bona fide in nature. No deduction is permissible to the extent 
it is founded on a transfer that is essentially donative in character 
(a mere cloak for a gift or bequest) except to the extent the deduction 
is for a claim that would be allowable as a deduction under section 
2055 as a charitable bequest.
    (ii) Claims and expenses involving family members. Factors 
indicative (but not necessarily determinative) of the bona fide nature 
of a claim or expense involving a family member of a decedent, a 
related entity, or a beneficiary of a decedent's estate or revocable 
trust, in relevant instances, may include, but are not limited to, the 
following--
    (A) The transaction underlying the claim or expense occurs in the 
ordinary course of business, is negotiated at arm's length, and is free 
from donative intent.
    (B) The nature of the claim or expense is not related to an 
expectation or claim of inheritance.
    (C) The claim or expense originates pursuant to an agreement 
between the decedent and the family member, related entity, or 
beneficiary, and the agreement is substantiated with contemporaneous 
evidence.
    (D) Performance by the claimant is pursuant to the terms of an 
agreement between the decedent and the family member, related entity, 
or beneficiary and the performance and the agreement can be 
substantiated.
    (E) All amounts paid in satisfaction or settlement of a claim or 
expense are reported by each party for Federal income and employment 
tax purposes, to the extent appropriate, in a manner that is consistent 
with the reported nature of the claim or expense.

[[Page 53658]]

    (iii) Definitions. The following definitions apply for purposes of 
this paragraph (b)(2):
    (A) Family members include the spouse of the decedent; the 
grandparents, parents, siblings, and lineal descendants of the decedent 
or of the decedent's spouse; and the spouse and lineal descendants of 
any such grandparent, parent, and sibling. Family members include 
adopted individuals.
    (B) A related entity is an entity in which the decedent, either 
directly or indirectly, had a beneficial ownership interest at the time 
of the decedent's death or at any time during the three-year period 
ending on the decedent's date of death. Such an entity, however, shall 
not include a publicly-traded entity nor shall it include a closely-
held entity in which the combined beneficial interest, either direct or 
indirect, of the decedent and the decedent's family members, 
collectively, is less than 30 percent of the beneficial ownership 
interests (whether voting or non-voting and whether an interest in 
stock, capital and/or profits), as determined at the time a claim 
described in this section is being asserted. Notwithstanding the 
foregoing, an entity in which the decedent, directly or indirectly, had 
any managing interest (for example, as a general partner of a 
partnership or as a managing member of a limited liability company) at 
the time of the decedent's death shall be considered a related entity.
    (C) Beneficiaries of a decedent's estate include beneficiaries of a 
trust of the decedent.
    (3) Court decrees and settlements--(i) Court decree. If a court of 
competent jurisdiction over the administration of an estate reviews and 
approves expenditures for funeral expenses, administration expenses, 
claims against the estate, or unpaid mortgages (referred to in this 
section as a ``claim or expense''), a final judicial decision in that 
matter may be relied upon to establish the amount of a claim or expense 
that is otherwise deductible under section 2053 and these regulations 
provided that the court actually passes upon the facts on which 
deductibility depends. If the court does not pass upon those facts, its 
decree may not be relied upon to establish the amount of the claim or 
expense that is otherwise deductible under section 2053. It must appear 
that the court actually passed upon the merits of the claim. This will 
be presumed in all cases of an active and genuine contest. If the 
result reached appears to be unreasonable, this is some evidence that 
there was not such a contest, but it may be rebutted by proof to the 
contrary. Any amount meeting the requirements of this paragraph 
(b)(3)(i) is deductible to the extent it actually has been paid or will 
be paid, subject to any applicable limitations in this section.
    (ii) Claims and expenses where court approval not required under 
local law. A deduction for the amount of a claim or expense that is 
otherwise deductible under section 2053 and these regulations will not 
be denied under section 2053 solely because a local court decree has 
not been entered with respect to such amount, provided that no court 
decree is required under applicable law to determine the amount or 
allowability of the claim or expense.
    (iii) Consent decree. A local court decree rendered by consent may 
be relied on to establish the amount of a claim or expense that is 
otherwise deductible under section 2053 and these regulations provided 
that the consent resolves a bona fide issue in a genuine contest. 
Consent given by all parties having interests adverse to that of the 
claimant will be presumed to resolve a bona fide issue in a genuine 
contest. Any amount meeting the requirements of this paragraph 
(b)(3)(iii) is deductible to the extent it actually has been paid or 
will be paid, subject to any applicable limitations in this section.
    (iv) Settlements. A settlement may be relied on to establish the 
amount of a claim or expense (whether contingent or noncontingent) that 
is otherwise deductible under section 2053 and these regulations, 
provided that the settlement resolves a bona fide issue in a genuine 
contest and is the product of arm's-length negotiations by parties 
having adverse interests with respect to the claim or expense. A 
deduction will not be denied for a settlement amount paid by an estate 
if the estate can establish that the cost of defending or contesting 
the claim or expense, or the delay associated with litigating the claim 
or expense, would impose a higher burden on the estate than the payment 
of the amount paid to settle the claim or expense. Nevertheless, no 
deduction will be allowed for amounts paid in settlement of an 
unenforceable claim. For this purpose, to the extent a claim exceeds an 
applicable limit under local law, the claim is deemed to be 
unenforceable. However, as long as the enforceability of the claim is 
at issue in a bona fide dispute, the claim will not be deemed to be 
unenforceable for this purpose. Any amount meeting the requirements of 
this paragraph (b)(3)(iv) is deductible to the extent it actually has 
been paid or will be paid, subject to any applicable limitations in 
this section.
    (v) Additional rules. Notwithstanding paragraph (b)(3)(i) through 
(iv) of this section, additional rules may apply to the deductibility 
of certain claims and expenses. See Sec.  20.2053-2 for additional 
rules regarding the deductibility of funeral expenses. See Sec.  
20.2053-3 for additional rules regarding the deductibility of 
administration expenses. See Sec.  20.2053-4 for additional rules 
regarding the deductibility of claims against the estate. See Sec.  
20.2053-7 for additional rules regarding the deductibility of unpaid 
mortgages.
    (4) Examples. Unless otherwise provided, assume that the amount of 
any claim or expense is paid out of property subject to claims and is 
paid within the time prescribed for filing the ``United States Estate 
(and Generation-Skipping Transfer) Tax Return,'' Form 706. The 
following examples illustrate the application of this paragraph (b):

    Example 1. Consent decree at variance with the law of the State. 
Decedent's (D's) estate is probated in State. D's probate estate is 
valued at $100x. State law provides that the executor's commission 
shall not exceed 3 percent of the probate estate. A consent decree 
is entered allowing the executor's commission in the amount of $5x. 
The estate pays the executor's commission in the amount of $5x. For 
purposes of section 2053, the executor may deduct only $3x of the 
$5x expense paid for the executor's commission because the amount 
approved by the consent decree in excess of $3x is in excess of the 
applicable limit for executor's commissions under local law. 
Therefore, for purposes of section 2053, the consent decree may not 
be relied upon to establish the amount of the expense for the 
executor's commission.
    Example 2. Decedent's (D's) estate is probated in State. State 
law grants authority to an executor to administer an estate without 
court approval, so long as notice of and a right to object to a 
proposed action is provided to interested persons. The executor of 
D's estate (E) proposes to sell property of the estate in order to 
pay the debts of D. E gives requisite notice to all interested 
parties and no interested person objects. E sells the real estate 
and pays a real estate commission of $20x to a professional real 
estate agent. The amount of the real estate commission paid does not 
exceed the applicable limit under State law. Provided that the sale 
of the property was necessary to pay D's debts, expenses of 
administration, or taxes, to preserve the estate, or to effect 
distribution, the executor may deduct the $20x expense for the real 
estate commission under section 2053 even though no court decree was 
entered approving the expense.
    Example 3. Claim by family member. For a period of three years 
prior to D's death, D's niece (N) provides accounting and 
bookkeeping services on D's behalf. N is a CPA and provides similar 
accounting and bookkeeping services to unrelated clients. At the end 
of each month, N presents an itemized bill to D for services 
rendered. The fees charged by N conform to the prevailing market 
rate for the services rendered and are comparable to the fees N 
charges other

[[Page 53659]]

clients for similar services. The amount due is timely paid each 
month by D and is properly reported for Federal income and 
employment tax purposes by N. In the six months prior to D's death, 
D's poor health prevents D from making payments to N for the amount 
due. After D's death, N asserts a claim against the estate for $25x, 
an amount representing the amount due for the six-month period prior 
to D's death. D's estate pays $25x to N in satisfaction of the claim 
before the return is timely filed and N properly reports the $25x 
received by E for income tax purposes. Barring any other relevant 
facts or circumstances, E may rely on the following factors to 
establish that the claim is bona fide: (1) N's claim for services 
rendered arose in the ordinary course of business, as N is a CPA 
performing similar services for other clients; (2) the fees charged 
were deemed to be negotiated at arm's length, as the fees were 
consistent with the fees N charged for similar services to unrelated 
clients; (3) the billing records and the records of D's timely 
payments to N constitute contemporaneous evidence of an agreement 
between D and N for N's bookkeeping services; and (4) the amount of 
the payments to N is properly reported by N for Federal income and 
employment tax purposes. E may deduct the amount paid to N in 
satisfaction of the claim.
* * * * *
    (d) Amount deductible--(1) General rule. To take into account 
properly events occurring after the date of a decedent's death in 
determining the amount deductible under section 2053 and these 
regulations, the deduction for any claim or expense described in 
paragraph (a) of this section is limited to the total amount actually 
paid in settlement or satisfaction of that item (subject to any 
applicable limitations in this section). However, see paragraph (d)(4) 
of this section for the rules for deducting certain ascertainable 
amounts; see Sec.  20.2053-4(b) and (c) for the rules regarding the 
deductibility of certain claims against the estate; and see Sec.  
20.2053-7 for the rules regarding the deductibility of unpaid mortgages 
and other indebtedness.
    (2) Application of post-death events. In determining whether and to 
what extent a deduction under section 2053 is allowable, events 
occurring after the date of a decedent's death will be taken into 
consideration--
    (i) Until the expiration of the applicable period of limitations on 
assessment prescribed in section 6501 (including without limitation at 
all times during which the running of the period of limitations is 
suspended); and
    (ii) During subsequent periods, in determining the amount (if any) 
of an overpayment of estate tax due in connection with a claim for 
refund filed within the time prescribed in section 6511(a).
    (3) Reimbursements. A deduction is not allowed to the extent that a 
claim or expense described in paragraph (a) of this section is or could 
be compensated for by insurance or otherwise could be reimbursed. If 
the executor is able to establish that only a partial reimbursement 
could be collected, then only that portion of the potential 
reimbursement that reasonably could have been expected to be collected 
will reduce the estate's deductible portion of the total claim or 
expense. An executor may certify that the executor neither knows nor 
reasonably should have known of any available reimbursement for a claim 
or expense described in section 2053(a) or (b) on the estate's United 
States Estate (and Generation-Skipping Transfer) Tax Return (Form 706), 
in accordance with the instructions for that form. A potential 
reimbursement will not reduce the deductible amount of a claim or 
expense to the extent that the executor, on Form 706 and in accordance 
with the instructions for that form, provides a reasonable explanation 
for his or her reasonable determination that the burden of necessary 
collection efforts in pursuit of a right of reimbursement would 
outweigh the anticipated benefit from those efforts. Nevertheless, even 
if a reasonable explanation is provided, subsequent events (including 
without limitation an actual reimbursement) occurring within the period 
described in Sec.  20.2053-1(d)(2) will be considered in determining 
the amount (if any) of a reduction under this paragraph (d)(3) in the 
deductible amount of a claim or expense.
    (4) Exception for certain ascertainable amounts--(i) General rule. 
A deduction will be allowed for a claim or expense that satisfies all 
applicable requirements even though it is not yet paid, provided that 
the amount to be paid is ascertainable with reasonable certainty and 
will be paid. For example, executors' commissions and attorneys' fees 
that are not yet paid, and that meet the requirements for deductibility 
under Sec.  20.2053-3(b) and (c), respectively, are deemed to be 
ascertainable with reasonable certainty and may be deducted if such 
expenses will be paid. However, no deduction may be taken upon the 
basis of a vague or uncertain estimate. To the extent a claim or 
expense is contested or contingent, such a claim or expense cannot be 
ascertained with reasonable certainty.
    (ii) Effect of post-death events. A deduction under this paragraph 
(d)(4) will be allowed to the extent the Commissioner is reasonably 
satisfied that the amount to be paid is ascertainable with reasonable 
certainty and will be paid. In making this determination, the 
Commissioner will take into account events occurring after the date of 
a decedent's death. To the extent the amount for which a deduction was 
claimed does not satisfy the requirements of this paragraph (d)(4), and 
is not otherwise deductible, the deduction will be disallowed by the 
Commissioner. If a deduction is claimed on Form 706 for an amount that 
is not yet paid and the deduction is disallowed in whole or in part (or 
if no deduction is claimed on Form 706), then if the claim or expense 
subsequently satisfies the requirements of this paragraph (d)(4) or is 
paid, relief may be sought by filing a claim for refund. To preserve 
the estate's right to claim a refund for amounts becoming deductible 
after the expiration of the period of limitation for the filing of a 
claim for refund, a protective claim for refund may be filed in 
accordance with paragraph (d)(5) of this section.
    (5) Protective claim for refund--(i) In general. A protective claim 
for refund under this section may be filed at any time before the 
expiration of the period of limitation prescribed in section 6511(a) 
for the filing of a claim for refund to preserve the estate's right to 
claim a refund by reason of claims or expenses that are not paid or do 
not otherwise meet the requirements of deductibility under section 2053 
and these regulations until after the expiration of the period of 
limitation for filing a claim for refund. Such a protective claim shall 
be made in accordance with guidance that may be provided from time to 
time by publication in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2)(ii)(b)). Although the protective claim need not state a 
particular dollar amount or demand an immediate refund, a protective 
claim must identify each outstanding claim or expense that would have 
been deductible under section 2053(a) or (b) if such item already had 
been paid and must describe the reasons and contingencies delaying the 
actual payment of the claim or expense. Action on protective claims 
will proceed after the executor has notified the Commissioner within a 
reasonable period that the contingency has been resolved and that the 
amount deductible under Sec.  20.2053-1 has been established.
    (ii) Effect on marital and charitable deduction. To the extent that 
a protective claim for refund is filed with respect to a claim or 
expense that would have been deductible under section 2053(a) or (b) if 
such item already had been paid and that is payable out of a share that 
meets the requirements for a

[[Page 53660]]

charitable deduction under section 2055 or a marital deduction under 
section 2056 or section 2056A, or from a combination thereof, neither 
the charitable deduction nor the marital deduction shall be reduced by 
the amount of such claim or expense until the amount is actually paid 
or meets the requirements of paragraph (d)(4) of this section for 
deducting certain ascertainable amounts or the requirements of Sec.  
20.2053-4(b) or (c) for deducting certain claims against the estate.
    (6) [Reserved].
    (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 the claims against the estate are not deductible 
under Sec.  20.2053-4(b) or (c). Also assume, unless otherwise 
provided, that none of the limitations on the amount of the deduction 
described in this section apply to the deduction claimed under section 
2053. The following examples illustrate the application of this 
paragraph (d):

    Example 1. Amount of expense ascertainable. Decedent's (D's) 
estate was probated in State. State law provides that the personal 
representative shall receive compensation equal to 2.5 percent of 
the value of the probate estate. The executor (E) may claim a 
deduction for estimated fees equal to 2.5 percent of D's probate 
estate on the Form 706 filed for D's estate under the rule for 
deducting certain ascertainable amounts set forth in paragraph 
(d)(4) of this section, provided that the estimated amount will be 
paid. However, the Commissioner will disallow the deduction upon 
examination of the estate's Form 706 to the extent that the amount 
for which a deduction was claimed no longer satisfies the 
requirements of paragraph (d)(4) of this section. If this occurs, E 
may file a protective claim for refund in accordance with paragraph 
(d)(5) of this section in order to preserve the estate's right to 
claim a refund for the amount of the fee that is subsequently paid 
or that subsequently meets the requirements of paragraph (d)(4) of 
this section for deducting certain ascertainable amounts.
    Example 2. Amount of claim not ascertainable. Prior to death, 
Decedent (D) is sued by Claimant (C) for $100x in a tort proceeding 
and responds asserting affirmative defenses available to D under 
applicable local law. C and D are unrelated. D subsequently dies and 
D's Form 706 is due before a final judgment is entered in the case. 
The executor of D's estate (E) may not 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 cannot be ascertained with reasonable certainty. However, E 
may file a timely protective claim for refund in accordance with 
paragraph (d)(5) of this section in order to preserve the estate's 
right to subsequently claim a refund at the time a final judgment is 
entered in the case and the claim is either paid or meets the 
requirements of paragraph (d)(4) of this section for deducting 
certain ascertainable amounts.
    Example 3. Amount of claim payable out of property qualifying 
for marital deduction. The facts are the same as in Example 2 except 
that the applicable credit amount, under section 2010, against the 
estate tax was fully consumed by D's lifetime gifts, D is survived 
by Spouse (S), and D's estate passes entirely to S in a bequest that 
qualifies for the marital deduction under section 2056. Even though 
any amount D's estate ultimately pays with respect to C's claim will 
be paid from the assets qualifying for the marital deduction, in 
filing Form 706, E need not reduce the amount of the marital 
deduction claimed on D's Form 706. Instead, pursuant to the 
protective claim filed by E, the marital deduction will be reduced 
by the claim once a final judgment is entered in the case. 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.
* * * * *
    (f) Effective/applicability date. This section applies to the 
estates of decedents dying on or after October 20, 2009.

0
Par. 4. Section 20.2053-3 is amended by:
0
1. Revising paragraph (b)(1) and the second sentence of paragraph 
(b)(2).
0
2. Revising paragraph (c)(1) and the second sentence of paragraph 
(c)(2).
0
3. Revising the second sentence of paragraph (d)(1) and the first 
sentence of paragraph (d)(2).
0
4. Adding paragraphs (d)(3) and (e).
    The revisions and additions read as follows:


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

* * * * *
    (b) Executor's commissions--(1) Executors' commissions are 
deductible to the extent permitted by Sec.  20.2053-1 and this section, 
but no deduction may be taken if no commissions are to be paid. In 
addition, the amount of the commissions claimed as a deduction must be 
in accordance with the usually accepted standards and practice of 
allowing such an amount in estates of similar size and character in the 
jurisdiction in which the estate is being administered, or any 
deviation from the usually accepted standards or range of amounts 
(permissible under applicable local law) must be justified to the 
satisfaction of the Commissioner.
    (2) * * * If, however, the terms of the will set forth the 
compensation payable to the executor for services to be rendered in the 
administration of the estate, a deduction may be taken to the extent 
that the amount so fixed does not exceed the compensation allowable by 
the local law or practice and to the extent permitted by Sec.  20.2053-
1.
* * * * *
    (c) Attorney's fees--(1) Attorney's fees are deductible to the 
extent permitted by Sec.  20.2053-1 and this section. Further, the 
amount of the fees claimed as a deduction may not exceed a reasonable 
remuneration for the services rendered, taking into account the size 
and character of the estate, the law and practice in the jurisdiction 
in which the estate is being administered, and the skill and expertise 
of the attorneys.
    (2) * * * A deduction for reasonable attorney's fees actually 
incurred in contesting an asserted deficiency or in prosecuting a claim 
for refund will be allowed to the extent permitted by Sec.  20.2053-1 
even though the deduction, as such, was not claimed on the estate tax 
return or in the claim for refund. * * *
* * * * *
    (d) * * *
    (1) * * * Expenses necessarily incurred in preserving and 
distributing the estate, including the cost of storing or maintaining 
property of the estate if it is impossible to effect immediate 
distribution to the beneficiaries, are deductible to the extent 
permitted by Sec.  20.2053-1. * * *
    (2) Expenses for selling property of the estate are deductible to 
the extent permitted by Sec.  20.2053-1 if the sale is necessary in 
order to pay the decedent's debts, expenses of administration, or 
taxes, to preserve the estate, or to effect distribution. * * *
    (3) Expenses incurred in defending the estate against claims 
described in section 2053(a)(3) are deductible to the extent permitted 
by Sec.  20.2053-1 if the expenses are incurred incident to the 
assertion of defenses to the claim available under the applicable law, 
even if the estate ultimately does not prevail. For purposes of this 
paragraph (d)(3), ``expenses incurred in defending the estate against 
claims'' include costs relating to the arbitration and mediation of 
contested issues, costs associated with defending the estate against 
claims (whether or not enforceable), and costs associated with reaching 
a negotiated settlement of the issues.
    (e) Effective/applicability date. This section applies to the 
estates of decedents dying on or after October 20, 2009.

0
Par. 5. Section 20.2053-4 is revised to read as follows:

[[Page 53661]]

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

    (a) In general--(1) General rule. For purposes of this section, 
liabilities imposed by law or arising out of contracts or torts are 
deductible if they meet the applicable requirements set forth in Sec.  
20.2053-1 and this section. To be deductible, a claim against a 
decedent's estate must represent a personal obligation of the decedent 
existing at the time of the decedent's death. Except as otherwise 
provided in paragraphs (b) and (c) of this section and to the extent 
permitted by