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Sunday, October 25, 2009

SECTION 2053 REGULATIONS ADOPT "WAIT AND SEE" APPROACH

The IRS has issued final Regulations regarding the influence of post-death events on deductions under Code Section 2053 for claims and expenses. The Regulations intentionally adopt an interpretation under Section 2053 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.

This means that for claims against an estate that cannot be paid before the due date of the estate tax payment, estates will have to pay taxes without benefit of a deduction (except to the extent that the claims come within an exception to requirement of payment for deduction). This can have a substantial adverse effect on the estate. The ability to get a deduction LATER via a refund claim (with or without a protective refund claim if needed to keep the statute of limitations open) provides cold comfort for estates that may need to sell assets or otherwise position themselves so as to be able to make an estate tax payment that may ultimately have been needed.

The Regulations also provide guidance on other claim and expense deduction issues, including the weight to be given to court decrees, consent decrees, litigation settlements, and the like in regard to determining an amount and validity of claims against an estate, the deductibility of executor and attorneys fees, and interest on claims.

I have prepared a detailed outline of the new provisions. A Word version is available here or at http://tinyurl.com/yjz2277, and a mindmap version is available here or at http://tinyurl.com/yhfn7j6 (Adobe Reader or Adobe Acrobat is recommended to view the map).
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