(a) General rule. The taxable estate of a decedent who was a citizen or resident (see §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 §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.

Par. 3. Section 20.2053-1 is amended by:

1. Revising paragraphs (a), (b)(2), (b)(3), and adding paragraph (b)(4).

2. Redesignating paragraph (d) as paragraph (e).

3. Adding paragraphs (d) and (f).

The revisions and additions read as follows:

(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 §§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.

(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 §20.2053-2 for additional rules regarding the deductibility of funeral expenses. See §20.2053-3 for additional rules regarding the deductibility of administration expenses. See §20.2053-4 for additional rules regarding the deductibility of claims against the estate. See §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 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 §20.2053-4(b) and (c) for the rules regarding the deductibility of certain claims against the estate; and see §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 §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 §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 §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 §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 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 §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 §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 for refund 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.

Par. 4. Section 20.2053-3 is amended by:

1. Revising paragraph (b)(1) and the second sentence of paragraph (b)(2).

2. Revising paragraph (c)(1) and the second sentence of paragraph (c)(2).

3. Revising the second sentence of paragraph (d)(1) and the first sentence of paragraph (d)(2).

4. Adding paragraphs (d)(3) and (e).

The revisions and additions read as follows:

* * * * *

(b) Executor’s commissions—(1) Executors’ commissions are deductible to the extent permitted by §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 §20.2053-1.

* * * * *

(c) Attorney’s fees—(1) Attorney’s fees are deductible to the extent permitted by §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 §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 §20.2053-1. * * *

(2) Expenses for selling property of the estate are deductible to the extent permitted by §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 §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.

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

(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 §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 §20.2053-1, the amounts that may be deducted as claims against a decedent’s estate are limited to the amounts of bona fide claims that are enforceable against the decedent’s estate (and are not unenforceable when paid) and claims that—

(i) Are actually paid by the estate in satisfaction of the claim; or

(ii) Meet the requirements of §20.2053-1(d)(4) for deducting certain ascertainable amounts.

(2) Effect of post-death events. Events occurring after the date of a decedent’s death shall be considered in determining whether and to what extent a deduction is allowable under section 2053. See §20.2053-1(d)(2).

(b) Exception for claims and counterclaims in related matter—(1) General rule. If a decedent’s gross estate includes one or more claims or causes of action and there are one or more claims against the decedent’s estate in the same or a substantially-related matter, or, if a decedent’s gross estate includes a particular asset and there are one or more claims against the decedent’s estate integrally related to that particular asset, the executor may deduct on the estate’s United States Estate (and Generation-Skipping Transfer) Tax Return (Form 706) the current value of the claim or claims against the estate, even though payment has not been made, provided that—

(i) Each such claim against the estate otherwise satisfies the applicable requirements set forth in §20.2053-1;

(ii) Each such claim against the estate represents a personal obligation of the decedent existing at the time of the decedent’s death;

(iii) Each such claim is enforceable against the decedent’s estate (and is not unenforceable when paid);

(iv) 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 Internal Revenue Code and the corresponding regulations;

(v) The value of each such claim against the estate is subject to adjustment for post-death events; and

(vi) The aggregate value of the related claims or assets included in the decedent’s gross estate exceeds 10 percent of the decedent’s gross estate.

(2) Limitation on deduction. The deduction under this paragraph (b) is limited to the value of the related claims or particular assets included in decedent’s gross estate.

(3) Effect of post-death events. If, under this paragraph (b), a deduction is claimed on Form 706 for a claim against the estate and, during the period described in §20.2053-1(d)(2), the claim is paid or meets the requirements of §20.2053-1(d)(4) for deducting certain ascertainable amounts, the claimed deduction is subject to adjustment to reflect, and may not exceed, the amount paid on the claim or the amount meeting the requirements of §20.2053-1(d)(4). If, under this paragraph (b), a deduction is claimed on Form 706 for a claim against the estate and, during the period described in §20.2053-1(d)(2), the claim remains unpaid (and does not meet the requirements of §20.2053-1(d)(4) for deducting certain ascertainable amounts), the claimed deduction is subject to adjustment to reflect, and may not exceed, the current valuation of the claim. A valuation of the claim will be considered current if it reflects events occurring after the decedent’s death. With regard to any amount in excess of the amount deductible under this paragraph (b), an estate may preserve the estate’s right to claim a refund for claims that are paid or that meet the requirements of §20.2053-(1)(d)(4) after the expiration of the period of limitation for filing a claim for refund by filing a protective claim for refund in accordance with the rules in §20.2053-1(d)(5).

(c) Exception for claims totaling not more than $500,000—(1) General rule. An executor may deduct on Form 706 the current value of one or more claims against the estate even though payment has not been made on the claim or claims to the extent that—

(i) Each such claim against the estate otherwise satisfies the applicable requirements for deductibility set forth in §20.2053-1;

(ii) Each such claim against the estate represents a personal obligation of the decedent existing at the time of the decedent’s death;

(iii) Each such claim is enforceable against the decedent’s estate (and is not unenforceable when paid);

(iv) 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 Internal Revenue Code and the corresponding regulations;

(v) The total amount deducted by the estate under this paragraph (c) does not exceed $500,000;

(vi) The full value of each claim, rather than just a portion of that amount, must be deductible under this paragraph (c) and, for this purpose, the full value of each such claim is deemed to be the unpaid amount of that claim that is not deductible after the application of §§20.2053-1 and 20.2053-4(b); and

(vii) The value of each claim deducted under this paragraph (c) is subject to adjustment for post-death events.

(2) Effect of post-death events. If, under this paragraph (c), a deduction is claimed for a claim against the estate and, during the period described in §20.2053-1(d)(2), the claim is paid or meets the requirements of §20.2053-1(d)(4) for deducting certain ascertainable amounts, the amount of the allowable deduction for that claim is subject to adjustment to reflect, and may not exceed, the amount paid on the claim or the amount meeting the requirements of §20.2053-1(d)(4). If, under this paragraph (c), a deduction is claimed for a claim against the estate and, during the period described in §20.2053-1(d)(2), the claim remains unpaid (and does not meet the requirements of §20.2053-1(d)(4) for deducting certain ascertainable amounts), the amount of the allowable deduction for that claim is subject to adjustment to reflect, and may not exceed, the current value of the claim. The value of the claim will be considered current if it reflects events occurring after the decedent’s death. To claim a deduction for amounts in excess of the amount deductible under this paragraph (c), the estate may preserve the estate’s right to claim a refund for claims that are not paid or that do not meet the requirements of §20.2053-1(d)(4) until after the expiration of the period of limitation for the filing of a claim for refund by filing a protective claim for refund in accordance with the rules in §20.2053-1(d)(5).

(3) Examples. The following examples illustrate the application of this paragraph (c). Assume that the value of each claim is determined from a “qualified appraisal” performed by a “qualified appraiser” and reflects events occurring after the death of the decedent (D). Also assume that each claim represents a personal obligation of D that existed at D’s death, that each claim is enforceable against the decedent’s estate (and is not unenforceable when paid), and that each claim otherwise satisfies the requirements for deductibility of §20.2053-1.

Example 1. There are three claims against the estate of the decedent (D) that are not paid and are not deductible under §20.2053-1(d)(4) or paragraph (b) of this section: $25,000 of Claimant A, $35,000 of Claimant B, and $1,000,000 of Claimant C. The executor of D’s estate (E) may not claim a deduction under this paragraph with respect to any portion of the claim of Claimant C because the value of that claim exceeds $500,000. E may claim a deduction under this paragraph for the total amount of the claims filed by Claimant A and Claimant B ($60,000) because the aggregate value of the full amount of those claims does not exceed $500,000.

Example 2. There are three claims against the estate of the decedent (D) that are not paid and are not deductible under §20.2053-1(d)(4) or paragraph (b) of this section; specifically, a separate $200,000 claim of each of three claimants, A, B and C. The executor of D’s estate (E) may claim a deduction under this paragraph for any two of these three claims because the aggregate value of the full amount of any two of the claims does not exceed $500,000. E may not deduct any part of the value of the remaining claim under this paragraph because the aggregate value of the full amount of all three claims would exceed $500,000.

Example 3. As a result of an automobile accident involving the decedent (D) and A, D’s gross estate includes a claim against A that is valued at $750,000. In the same matter, A files a counterclaim against D’s estate that is valued at $1,000,000. A’s claim against D’s estate is not paid and is not deductible under §20.2053-1(d)(4). All other section 2053 claims and expenses of D’s estate have been paid and are deductible. The executor of D’s estate (E) deducts $750,000 of A’s claim against the estate under §20.2053-4(b). E may claim a deduction under this paragraph (c) for the total value of A’s claim not deducted under §20.2053-4(b), or $250,000. If, instead, the value of A’s claim against D’s estate is $1,500,000, so that the amount not deductible under §20.2053-4(b) exceeds $500,000, no deduction is available under this paragraph (c).

(d) Special rules—(1) Potential and unmatured claims. Except as provided in §20.2053-1(d)(4) and in paragraphs (b) and (c) of this section, no estate tax deduction may be taken for a claim against the decedent’s estate while it remains a potential or unmatured claim. Claims that later mature may be deducted (to the extent permitted by §20.2053-1) in connection with a timely claim for refund. To preserve the estate’s right to claim a refund for claims that mature and become deductible after the expiration of the period of limitation for filing a claim for refund, a protective claim for refund may be filed in accordance with §20.2053-1(d)(5). See §20.2053-1(b)(3) for rules relating to the treatment of court decrees and settlements.

(2) Contested claims. Except as provided in paragraphs (b) and (c) of this section, no estate tax deduction may be taken for a claim against the decedent’s estate to the extent the estate is contesting the decedent’s liability. Contested claims that later mature may be deducted (to the extent permitted by §20.2053-1) in connection with a claim for refund filed within the time prescribed in section 6511(a). To preserve the estate’s right to claim a refund for claims that mature and become deductible after the expiration of the period of limitation for the filing a claim for refund, a protective claim for refund may be filed in accordance with §20.2053-1(d)(5). See §20.2053-1(b)(3) for rules relating to the treatment of court decrees and settlements.

(3) Claims against multiple parties. If the decedent or the decedent’s estate is one of two or more parties against whom the claim is being asserted, the estate may deduct only the portion of the total claim due from and paid by the estate, reduced by the total of any reimbursement received from another party, insurance, or otherwise. The estate’s deductible portion also will be reduced by the contribution or other amount the estate could have collected from another party or an insurer but which the estate declines or fails to attempt to collect. See further §20.2053-1(d)(3).

(4) Unenforceable claims. Claims that are unenforceable prior to or at the decedent’s death are not deductible, even if they are actually paid. Claims that become unenforceable during the administration of the estate are not deductible to the extent that they are paid (or will be paid) after they become unenforceable. However, see §20.2053-1(b)(3)(iv) regarding a claim whose enforceability is at issue.

(5) Claims founded upon a promise. Except with regard to pledges or subscriptions (see §20.2053-5), section 2053(c)(1)(A) provides that the deduction for a claim founded upon a promise or agreement is limited to the extent that the promise or agreement was bona fide and in exchange for adequate and full consideration in money or money’s worth; that is, the promise or agreement must have been bargained for at arm’s length and the price must have been an adequate and full equivalent reducible to a money value.

(6) Recurring payments—(i) Noncontingent obligations. If a decedent is obligated to make recurring payments on an enforceable and certain claim that satisfies the requirements for deductibility under this section and the payments are not subject to a contingency, the amount of the claim will be deemed ascertainable with reasonable certainty for purposes of the rule for deducting certain ascertainable amounts set forth in §20.2053-1(d)(4). If the recurring payments will be paid, a deduction will be allowed under the rule for deducting certain ascertainable amounts set forth in §20.2053-1(d)(4) (subject to any applicable limitations in §20.2053-1). Recurring payments for purposes of this section exclude those payments made in connection with a mortgage or indebtedness described in and governed by §20.2053-7. If a decedent’s obligation to make a recurring payment is contingent on the death or remarriage of the claimant and otherwise satisfies the requirements of this paragraph (d)(6)(i), the amount of the claim (measured according to actuarial principles, using factors set forth in the transfer tax regulations or otherwise provided by the IRS) will be deemed ascertainable with reasonable certainty for purposes of the rule for deducting certain ascertainable amounts set forth in §20.2053-1(d)(4).

(ii) Contingent obligations. If a decedent has a recurring obligation to pay an enforceable and certain claim but the decedent’s obligation is subject to a contingency or is not otherwise described in paragraph (d)(6)(i) of this section, the amount of the claim is not ascertainable with reasonable certainty for purposes of the rule for deducting certain ascertainable amounts set forth in §20.2053-1(d)(4). Accordingly, the amount deductible is limited to amounts actually paid by the estate in satisfaction of the claim in accordance with §20.2053-1(d)(1) (subject to any applicable limitations in §20.2053-1).

(iii) Purchase of commercial annuity to satisfy recurring obligation to pay. If a decedent has a recurring obligation (whether or not contingent) to pay an enforceable and certain claim and the estate purchases a commercial annuity from an unrelated dealer in commercial annuities in an arm’s-length transaction to satisfy the obligation, the amount deductible by the estate (subject to any applicable limitations in §20.2053-1) is the sum of—

(A) The amount paid for the commercial annuity, to the extent that the amount paid is not refunded, or expected to be refunded, to the estate;

(B) Any amount actually paid to the claimant by the estate prior to the purchase of the commercial annuity; and

(C) Any amount actually paid to the claimant by the estate in excess of the annuity amount as is necessary to satisfy the recurring obligation.

(7) Examples. The following examples illustrate the application of paragraph (d) of this section. Except as is otherwise provided in the examples, assume—

(i) A claim satisfies the applicable requirements set forth in §20.2053-1 and paragraph (a) of this section, is payable from property subject to claims, and the amount of the claim is not subject to any other applicable limitations in §20.2053-1;

(ii) A claim is not deductible under paragraphs (b) or (c) of this section as an exception to the general rule contained in paragraph (a) of this section; and

(iii) The claimant (C) is not a family member, related entity or beneficiary of the estate of decedent (D) and is not the executor (E).

Example 1. Contested claim, single defendant, no decision. D is sued by C for $100x in a tort proceeding and responds asserting affirmative defenses available to D under applicable local law. D dies and E is substituted as defendant in the suit. D’s Form 706 is due before a judgment is reached in the case. D’s gross estate exceeds $100x. E may not take a deduction on Form 706 for the claim against the estate. However, E may claim a deduction under §20.2053-3(c) or §20.2053-3(d)(3) for expenses incurred in defending the estate against the claim if the expenses have been paid in accordance with §20.2053-1(d)(1) or if the expenses meet the requirements of §20.2053-1(d)(4) for deducting certain ascertainable amounts. E may file a protective claim for refund before the expiration of the period of limitation prescribed in section 6511(a) in order to preserve the estate’s right to claim a refund, if the amount of the claim will not be paid or cannot be ascertained with reasonable certainty by the expiration of this limitation period. If payment is subsequently made pursuant to a court decision or a settlement, the payment, as well as expenses incurred incident to the claim and not previously deducted, may be deducted and relief may be sought in connection with a timely-filed claim for refund.

Example 2. Contested claim, single defendant, final court decree and payment. The facts are the same as in Example 1 except that, before the Form 706 is timely filed, the court enters a decision in favor of C, no timely appeal is filed, and payment is made. E may claim a deduction on Form 706 for the amount paid in satisfaction of the claim against the estate pursuant to the final decision of the local court, including any interest accrued prior to D’s death. In addition, E may claim a deduction under §20.2053-3(c) or §20.2053-3(d)(3) for expenses incurred in defending the estate against the claim and in processing payment of the claim if the expenses have been paid in accordance with §20.2053-1(d)(1) or if the expenses meet the requirements of §20.2053-1(d)(4) for deducting certain ascertainable amounts.

Example 3. Contested claim, single defendant, settlement and payment. The facts are the same as in Example 1 except that a settlement is reached between E and C for $80x and payment is made before Form 706 is timely filed. E may claim a deduction on Form 706 for the amount paid to C ($80x) in satisfaction of the claim against the estate. In addition, E may claim a deduction under §20.2053-3(c) or §20.2053-3(d)(3) for expenses incurred in defending the estate, reaching a settlement, and processing payment of the claim if the expenses have been paid in accordance with §20.2053-1(d)(1) or if the expenses meet the requirements of §20.2053-1(d)(4) for deducting certain ascertainable amounts.

Example 4. Contested claim, multiple defendants. The facts are the same as in Example 1 except that the suit filed by C lists D and an unrelated third-party (K) as defendants. If the claim against the estate is not resolved prior to the time the Form 706 is filed, E may not take a deduction for the claim on Form 706. If payment is subsequently made of D’s share of the claim pursuant to a court decision holding D liable for 40 percent of the amount due and K liable for 60 percent of the amount due, then E may claim a deduction for the amount paid in satisfaction of the claim against the estate representing D’s share of the liability as assigned by the court decree ($40x), plus any interest on that share accrued prior to D’s death. If the court decision finds D and K jointly and severally liable for the entire $100x and D’s estate pays the entire $100x but could have reasonably collected $50x from K in reimbursement, E may claim a deduction of $50x together with the interest on $50x accrued prior to D’s death. In both instances, E also may claim a deduction under §20.2053-3(c) or §20.2053-3(d)(3) for expenses incurred and not previously deducted in defending the estate against the claim and processing payment of the amount due from D if the expenses have been paid in accordance with §20.2053-1(d)(1) or if the expenses meet the requirements of §20.2053-1(d)(4) for deducting certain ascertainable amounts.

Example 5. Contested claim, multiple defendants, settlement and payment. The facts are the same as in Example 1 except that the suit filed by C lists D and an unrelated third-party (K) as defendants. D’s estate settles with C for $10x and payment is made before Form 706 is timely filed. E may take a deduction on Form 706 for the amount paid to C ($10x) in satisfaction of the claim against the estate. In addition, E may claim a deduction under §20.2053-3(c) or §20.2053-3(d)(3) for expenses incurred in defending the estate, reaching a settlement, and processing payment of the claim if the expenses have been paid in accordance with §20.2053-1(d)(1) or if the expenses meet the requirements of §20.2053-1(d)(4) for deducting certain ascertainable amounts.

Example 6. Mixed claims. During life, D contracts with C to perform specific work on D’s home for $75x. Under the contract, additional work must be approved in advance by D. C performs additional work and sues D for $100x for work completed including the $75x agreed to in the contract. D dies and D’s Form 706 is due before a judgment is reached in the case. E accepts liability of $75x but contests liability of $25x. E may take a deduction of $75x on Form 706 if the amount has been paid or meets the requirements of §20.2053-1(d)(4) for deducting certain ascertainable amounts. In addition, E may claim a deduction under §20.2053-3(c) or §20.2053-3(d)(3) for expenses incurred in defending the estate against the claim if the expenses have been paid or if the expenses meet the requirements of §20.2053-1(d)(4) for deducting certain ascertainable amounts. E may file a protective claim for refund before the expiration of the period of limitation prescribed in section 6511(a) in order to preserve the estate’s right to claim a refund for any amount in excess of $75x that is subsequently paid to resolve the claim against the estate. To the extent that any unpaid expenses incurred in defending the estate against the claim are not deducted as an ascertainable amount pursuant to §20.2053-1(d)(4), they may be included in the protective claim for refund.

Example 7. Claim having issue of enforceability. D is sued by C for $100x in a tort proceeding in which there is an issue as to whether the claim is barred by the applicable period of limitations. After D’s death but prior to the decision of the court, a settlement meeting the requirements of §20.2053-1(b)(3)(iv) is reached between E and C in the amount of $50x. E pays C this amount before the Form 706 is timely filed. E may take a deduction on Form 706 for the amount paid to C ($50x) in satisfaction of the claim. If, subsequent to E’s payment to C, facts develop to indicate that the claim was, in fact, unenforceable, the deduction will not be denied provided the enforceability of the claim was at issue in a bona dispute at the time of the payment. See §20.2053-1(b)(3)(iv). A deduction may be available under §20.2053-3(d)(3) for expenses incurred in defending the estate, reaching a settlement, and processing payment of the claim if the expenses have been paid in accordance with §20.2053-1(d)(1) or if the expenses meet the requirements of §20.2053-1(d)(4) for deducting certain ascertainable amounts.

Example 8. Noncontingent and recurring obligation to pay, binding on estate. D’s property settlement agreement incident to D’s divorce, signed three years prior to D’s death, obligates D or D’s estate to pay to S, D’s former spouse, $20x per year until S’s death or remarriage. Prior to D’s death, D made payments in accordance with the agreement and, after D’s death, E continues to make the payments in accordance with the agreement. D’s obligation to pay S under the property settlement agreement is deemed to be a claim against the estate that is ascertainable with reasonable certainty for purposes of §20.2053-1(d)(4). To the extent the obligation to make the recurring payment is a claim that will be paid, E may deduct the amount of the claim (measured according to actuarial principles, using factors set forth in the transfer tax regulations or otherwise provided by the IRS) under the rule for deducting certain ascertainable amounts set forth in §20.2053-1(d)(4).

Example 9. Recurring obligation to pay, estate purchases a commercial annuity in satisfaction. D’s settlement agreement with T, the claimant in a suit against D, signed three years prior to D’s death, obligates D or D’s estate to pay to T $20x per year for 10 years, provided that T does not reveal the details of the claim or of the settlement during that period. D dies in Year 1. In Year 2, D’s estate purchases a commercial annuity from an unrelated issuer of commercial annuities, XYZ, to fund the obligation to T. E may deduct the entire amount paid to XYZ to obtain the annuity, even though the obligation to T was contingent.

(e) Interest on claim—(1) Subject to any applicable limitations in §20.2053-1, the interest on a deductible claim is itself deductible as a claim under section 2053 to the extent of the amount of interest accrued at the decedent’s death (even if the executor elects the alternate valuation method under section 2032), but only to the extent of the amount of interest actually paid or meeting the requirements of §20.2053-1(d)(4) for deducting certain ascertainable amounts.

(2) Post-death accrued interest may be deductible in appropriate circumstances either as an estate tax administration expense under section 2053 or as an income tax deduction.

(f) Effective/applicability date. This section applies to the estates of decedents dying on or after October 20, 2009.

Par. 6. Section 20.2053-5 is amended by:

1. Redesignating paragraphs (a) and (b) as (a)(1) and (a)(2).

2. Redesignating the introductory text as paragraph (a).

3. Revising newly redesignated paragraph (a).

4. Adding a new paragraph (b).

The revision and addition read as follows:

(a) A pledge or a subscription, evidenced by a promissory note or otherwise, even though enforceable against the estate, is deductible (subject to any applicable limitations in §20.2053-1) only to the extent that—

* * * * *

(b) Effective/applicability date. This section applies to the estates of decedents dying on or after October 20, 2009.

Par. 7. Section 20.2053-6 is amended by:

1. Revising paragraphs (a) and (c).

2. Adding paragraphs (g) and (h).

The revisions and additions read as follows:

(a) In general—(1) Taxes are deductible in computing a decedent’s gross estate—

(i) Only as claims against the estate (except to the extent that excise taxes may be allowable as administration expenses);

(ii) Only to the extent not disallowed by section 2053(c)(1)(B) and this section; and

(iii) Subject to any applicable limitations in §20.2053-1.

(2) See §§20.2053-9 and 20.2053-10 with respect to the deduction allowed for certain state and foreign death taxes.

* * * * *

(c) Death taxes—(1) For the estates of decedents dying on or before December 31, 2004, no estate, succession, legacy or inheritance tax payable by reason of the decedent’s death is deductible, except as provided in §§20.2053-9 and 20.2053-10 with respect to certain state and foreign death taxes on transfers for charitable, etc., uses. However, see sections 2011 and 2014 and the corresponding regulations with respect to credits for death taxes.

(2) For the estates of decedents dying after December 31, 2004, see section 2058 to determine the deductibility of state death taxes.

* * * * *

(g) Post-death adjustments of deductible tax liability. Post-death adjustments increasing a tax liability accrued prior to the decedent’s death, including increases of taxes deducted under this section, will increase the amount of the deduction available under section 2053(a)(3) for that tax liability. Similarly, any refund subsequently determined to be due to and received by the estate or its successor in interest with respect to taxes deducted by the estate under this section reduce the amount of the deduction taken for that tax liability under section 2053(a)(3). Expenses associated with defending the estate against the increase in tax liability or with obtaining the refund may be deductible under §20.2053-3(d)(3). A protective claim for refund of estate taxes may be filed before the expiration of the period of limitation for filing a claim for refund in order to preserve the estate’s right to claim a refund if the amount of a deductible tax liability may be affected by such an adjustment or refund. The application of this section may be illustrated by the following examples:

Example 1. Increase in tax due. After the decedent’s death, the Internal Revenue Service examines the gift tax return filed by the decedent in the year before the decedent’s death and asserts a deficiency of $100x. The estate pays attorney’s fees of $30x in a non-frivolous defense against the increased deficiency. The final determination of the deficiency, in the amount of $90x, is paid by the estate prior to the expiration of the limitation period for filing a claim for refund. The estate may deduct $90x under section 2053(a)(3) and $30x under §20.2053-3(c)(2) or (d)(3) in connection with a timely claim for refund.

Example 2. Refund of taxes paid. Decedent’s estate timely files D’s individual income tax return for the year in which the decedent died. The estate timely pays the entire amount of the tax due, $50x, as shown on that return. The entire $50x was attributable to income received prior to the decedent’s death. Decedent’s estate subsequently discovers an error on the income tax return and timely files a claim for refund of income tax. Decedent’s estate receives a refund of $10x. The estate is allowed a deduction of only $40x under section 2053(a)(3) for the income tax liability accrued prior to the decedent’s death. If D’s estate had claimed a deduction of $50x on D’s United States Estate (and Generation-Skipping Transfer) Tax Return (Form 706), the deduction claimed under section 2053(a)(3) will be allowed only to the extent of $40x upon examination by the Commissioner.

(h) Effective/applicability date. This section applies to the estates of decedents dying on or after October 20, 2009.

Par. 8. Section 20.2053-9 is amended by:

1. Adding a sentence at the end of paragraph (a).

2. Revising the first and last sentences of paragraph (c).

3. Adding paragraph (f).

The revisions and addition read as follows:

(a) * * * However, see section 2058 to determine the deductibility of state death taxes by estates to which section 2058 is applicable.

* * * * *

(c) * * * The election to take a deduction for a state death tax imposed upon a transfer for charitable, etc., uses shall be exercised by the executor by the filing of a written notification to that effect with the Commissioner. * * * The election may be revoked by the executor by the filing of a written notification to that effect with the Commissioner at any time before the expiration of such period.

* * * * *

(f) Effective/applicability date—(1) The last sentence of paragraph (a) of this section applies to the estates of decedents dying on or after October 20, 2009, to which section 2058 is applicable.

(2) The other provisions of this section apply to the estates of decedents dying on or after October 20, 2009, to which section 2058 is not applicable.

Par. 9. Section 20.2053-10 is amended by removing the language “district director” and adding the language “Commissioner” in its place in paragraph (c) and by adding a new paragraph (e) to read as follows:

* * * * *

(e) Effective/applicability date. This section applies to the estates of decedents dying on or after October 20, 2009.

Approved October 14, 2009.