Section 430 specifies the minimum funding requirements that apply to single-employer plans (except for CSEC plans under § 414(y)) pursuant to § 412. Section 430(h)(2) specifies the interest rates that must be used to determine a plan’s target normal cost and funding target. Under this provision, present value is generally determined using three 24-month average interest rates (“segment rates”), each of which applies to cash flows during specified periods. To the extent provided under § 430(h)(2)(C)(iv), these segment rates are adjusted by the applicable percentage of the 25-year average segment rates for the period ending September 30 of the year preceding the calendar year in which the plan year begins.¹ However, an election may be made under § 430(h)(2)(D)(ii) to use the monthly yield curve in place of the segment rates.

Notice 2007-81, 2007-44 I.R.B. 899, provides guidelines for determining the monthly corporate bond yield curve, and the 24-month average corporate bond segment rates used to compute the target normal cost and the funding target. Consistent with the methodology specified in Notice 2007-81, the monthly corporate bond yield curve derived from May 2022 data is in Table 2022-5 at the end of this notice. The spot first, second, and third segment rates for the month of May 2022 are, respectively, 3.23, 4.59, and 4.69.

The 24-month average segment rates determined under § 430(h)(2)(C)(i) through (iii) must be adjusted pursuant to § 430(h)(2)(C)(iv) to be within the applicable minimum and maximum percentages of the corresponding 25-year average segment rates. The 25-year average segment rates for plan years beginning in 2021 and 2022 were published in Notice 2020-72, 2020-40 I.R.B. 789, and Notice 2021-54, 2021-41 I.R.B. 457, respectively.

The three 24-month average corporate bond segment rates applicable for June 2022 without adjustment for the 25-year average segment rate limits are as follows:

Section 9706(a) of the American Rescue Plan Act of 2021, Pub. L. 117-2 (the ARP), which was enacted on March 11, 2021, changed the 25-year average segment rates and the applicable minimum and maximum percentages used under § 430(h)(2)(C)(iv) of the Code to adjust the 24-month average segment rates.² Prior to this change, the applicable minimum and maximum percentages were 85% and 115% for a plan year beginning in 2021, and 80% and 120% for a plan year beginning in 2022, respectively. After this change, the applicable minimum and maximum percentages are 95% and 105% for a plan year beginning in 2021 or 2022. In addition, pursuant to this change, any 25-year average segment rate that is less than 5% is deemed to be 5%.³

Pursuant to § 9706(c)(1) of the ARP, these changes apply with respect to plan years beginning on or after January 1, 2020. However, § 9706(c)(2) of the ARP provides that a plan sponsor may elect not to have these changes apply to any plan year beginning before January 1, 2022.⁴

The adjusted 24-month average segment rates set forth in the chart below reflect § 430(h)(2)(C)(iv) of the Code as amended by § 9706(a) of the ARP. These adjusted 24-month average segment rates apply only for plan years for which an election under § 9706(c)(2) of the ARP is not in effect. For a plan year for which such an election does not apply, the 24-month averages applicable for June 2022, adjusted to be within the applicable minimum and maximum percentages of the c/oableresponding 25-year average segment rates in accordance with § 430(h)(2)(C)(iv) of the Code, are as follows:

 

The adjusted 24-month average segment rates set forth in the chart below do not reflect the changes to § 430(h)(2)(C)(iv) of the Code made by § 9706(a) of the ARP. These adjusted 24-month average segment rates apply only for plan years for which an election under § 9706(c)(2) of the ARP is in effect. For a plan year for which such an election applies, the 24-month averages applicable for June 2022, adjusted to be within the applicable minimum and maximum percentages of the corresponding 25-year average segment rates in accordance with § 430(h)(2)(C)(iv) of the Code, are as follows:

Section 431 specifies the minimum funding requirements that apply to multiemployer plans pursuant to § 412. Section 431(c)(6)(B) specifies a minimum amount for the full-funding limitation described in § 431(c)(6)(A), based on the plan’s current liability. Section 431(c)(6)(E)(ii)(I) provides that the interest rate used to calculate current liability for this purpose must be no more than 5 percent above and no more than 10 percent below the weighted average of the rates of interest on 30-year Treasury securities during the four-year period ending on the last day before the beginning of the plan year. Notice 88-73, 1988-2 C.B. 383, provides guidelines for determining the weighted average interest rate. The rate of interest on 30-year Treasury securities for May 2022 is 3.06 percent. The Service determined this rate as the average of the daily determinations of yield on the 30-year Treasury bond maturing in February 2052 determined each day through May 11, 2022; and the yield rate on the 30-year Treasury Bond maturing in May 2052 determined each day for the balance of the month. For plan years beginning in June 2022, the weighted average of the rates of interest on 30-year Treasury securities and the permissible range of rates used to calculate current liability are as follows:

In general, the applicable interest rates under § 417(e)(3)(D) are segment rates computed without regard to a 24-month average. Notice 2007-81 provides guidelines for determining the minimum present value segment rates. Pursuant to that notice, the minimum present value segment rates determined for May 2022 are as follows:

The principal author of this notice is Tom Morgan of the Office of the Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the IRS participated in the development of this guidance. For further information regarding this notice, contact Mr. Morgan at 202-317-6700 or Osmundo Bernabe at 626-927-1344 (not toll-free numbers).

 

¹ Pursuant to § 433(h)(3)(A), the third segment rate determined under § 430(h)(2)(C) is used to determine the current liability of a CSEC plan (which is used to calculate the minimum amount of the full funding limitation under § 433(c)(7)(C)).

² Section 80602 of the Infrastructure Investment and Jobs Act, Pub. L. 117-58, makes further changes to the time periods for which specified applicable minimum and maximum percentages apply.

³ Pursuant to this change, the 25-year averages of the first segment rate for 2021 and 2022 are increased to 5.00% because those 25-year averages as originally published are below 5.00%.

⁴ This election may be made either for all purposes for which the amendments under § 9706 of the ARP apply or solely for purposes of determining the adjusted funding target attainment percentage under § 436 of the Code for the plan year.

The regulations are proposed to apply to the estate of each decedent dying on or after the date of publication in the Federal Register of a Treasury decision adopting these rules as final regulations.

Rev. Rul. 79-252 (1979-2 C.B. 333) states that interest on a Federal estate tax deficiency is a necessary administration expense under section 2053(a)(2) and is deductible to the extent allowable under local law. Rev. Rul. 81-154 (1981-1 C.B. 470) states, in the second holding, that interest incurred because of a late payment of tax is deductible under section 2053(a)(2) to the extent it is allowable under local law. Rev. Rul. 79-252 will be obsoleted and Rev. Rul. 81-154 will be modified, effective as of the date that a Treasury decision adopting these rules as final regulations is published in the Federal Register.

IRS revenue procedures, revenue rulings, notices, and other guidance cited in this document are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.

The principal authors of these regulations are Karlene Lesho and Melissa Liquerman, Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the Treasury Department and the IRS participated in their development.

Before these proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES section. The Treasury Department and the IRS request comments on all aspects of the proposed regulations.

Any electronic comments submitted, and to the extent practicable, any paper comments submitted, will be made available at www.regulations.gov or upon request.

A public hearing is being held by teleconference on October 12, 2022, at 10:00 a.m. EST unless no outlines are received by September 26, 2022.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to comment by telephone at the hearing must submit electronic or written comments and an outline of the topics to be discussed and the time to be devoted to each topic by September 26, 2022 as prescribed in the preamble under the ADDRESSES section. A period of ten minutes will be allotted to each person for making comments (although this rule may be waived in unusual circumstances or for good cause shown). After the deadline for receiving outlines has passed, the IRS will prepare an agenda containing the schedule of speakers. Copies of the agenda will be made available at www.regulations.gov, search IRS and REG-130975-08. Copies of the agenda will also be available by emailing a request to publichearings@irs.gov. Please put “REG-130975-08 Agenda Request” in the subject line of the email.

Announcement 2020-4, 2020-17 IRB 667 (April 20, 2020), provides that until further notice, public hearings conducted by the IRS will be held telephonically. Any telephonic hearing will be made accessible to people with disabilities.

Estate taxes, Reporting and recordkeeping requirements.

Accordingly, the IRS proposes to amend 26 CFR part 20 as follows:

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

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

Authority: 26 U.S.C. 7805.

* * * * *

Par. 2. Section 20.2053-1 is amended by:

1. Adding paragraph (d)(6).

2. Revising the introductory text of paragraph (d)(7).

3. In paragraph (d)(7), Examples 1 through 3 are designated as paragraphs (d)(7)(i) through (iii), respectively.

4. In newly designated paragraphs (d)(7)(i) and (ii):

i. Removing “ascertainable,” and adding “ascertainable.” in its place.

ii. Adding a sentence to the end of the paragraphs.

5. In newly designated paragraph (d)(7)(iii):

i. Removing “deduction,” and “Example 2” and adding “deduction.” and “paragraph (d)(7)(ii) of this section (Example 2)” in their places, respectively.

ii. Revising the last sentence of the paragraph.

6. Adding paragraphs (d)(7)(iv) through (vi).

7. Revising paragraph (f).

The additions and revisions read as follows:

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

* * * * *

(d) * * *

(6) Limitation on amount deductible--(i) Claims and expenses paid after the grace period--(A) Definitions. The following definitions apply for purposes of this paragraph (d):

(1) Grace period. The grace period is the period beginning on the date of the decedent’s death and extending through the third anniversary of that date.

(2) Post-grace-period payment. A post-grace-period payment is the amount of a claim or expense described in paragraph (a) of this section not paid or to be paid before the end of the grace period.

(B) General rule. To the extent that a post-grace-period payment otherwise meets the requirements for deductibility of a claim or expense under section 2053 and the regulations in this part thereunder, the amount deductible under section 2053 is limited to the present value, as of the decedent’s date of death, of that amount. The present value of each post-grace-period payment is calculated by discounting it from the payment date or expected date of payment to the decedent’s date of death. The applicable discount rate is the applicable Federal rate determined under section 1274(d) for the month in which the decedent’s death occurs, compounded annually. The length of time from the decedent’s date of death to the date of payment or expected date of payment will determine whether the Federal rate applicable to that payment is the Federal mid-term rate or the Federal long-term rate. The Internal Revenue Service publishes the applicable Federal rates for each month in the Internal Revenue Bulletin (see §601.601(d)(2)(ii) of this chapter). Any reasonable assumptions and methodology in regard to time period measurements may be used to calculate, in accordance with paragraph (d)(6)(ii) of this section, the present value of the post-grace-period payment(s).

(ii) Calculating present value of amounts paid or payable--(A) Single post-grace-period payment. The amount deductible under section 2053 for a single post-grace-period payment is computed by calculating the present value of such payment as follows:

Amount of future payment x [1 ÷ (1 + i)]^t

Where:

t is the amount of time (expressed in years and fractions of years) from the day after the decedent’s date of death to the payment date or expected date of payment; and

i is the applicable discount rate.

(B) Multiple post-grace-period payments. The amount deductible under section 2053 for multiple post-grace-period payments is computed by calculating the present value of each such payment using the formula in paragraph (d)(6)(ii)(A) of this section; the sum of the discounted amounts of the post-grace-period payments is the amount that is deductible for such payments.

(C) Multiple payment dates occurring during and after the grace period. A claim or expense described in paragraph (a) of this section may have at least one payment date or expected date of payment during the grace period and at least one payment date or expected date of payment after the grace period. For such a claim or expense, the amount deductible under section 2053 is computed by calculating the present value of each separate post-grace-period payment using the formula in paragraph (d)(6)(ii)(A) of this section, and adding the total of these discounted amounts to any amount of the claim or expense having a payment date or expected date of payment during the grace period. Any amount having a payment date or expected date of payment during the grace period is not discounted in arriving at the amount deductible.

(iii) Discounting when actual date of payment is unknown. With regard to a post-grace-period payment that may be deducted in advance of payment under paragraph (d)(4) of this section or §20.2053-4(b) or (c), the amount deductible must be determined by computing the present value of the amount of that post-grace-period payment as if that amount will be paid on the expected date of payment. The expected date of payment in settlement or satisfaction of a claim or expense must be determined using all information reasonably available to the taxpayer to make a fair and reasonable estimate of the expected date or dates of payment. For amounts deductible under §20.2053-4(b) or (c), the expected date or dates of payment must be identified in a written appraisal document of a person that is qualified by knowledge and experience to appraise the claim being valued. See §20.2053-4(b)(1)(iv) and (c)(1)(iv). However, the computation of present value is subject to adjustment if, within the period described in paragraph (d)(2) of this section, the actual date or dates of payment become known and differ from the estimated date or dates of payment. See paragraph (d)(6)(vi) of this section.

(iv) Statement supporting present value computation required. A deduction under section 2053 for a claim or expense that is required to be discounted to present value under paragraph (d)(6)(i) of this section must be supported by a statement to be filed with the Form 706 showing the computation of the present value of that item, including, if applicable, the basis for the determination of the expected date(s) of payment.

(v) Ordering rule. In computing the amount deductible for a claim or expense under paragraph (d) of this section, the amount deductible for a claim or expense (otherwise determined under paragraphs (d)(1) through (4) of this section) is discounted to present value under paragraph (d)(6) of this section before applying the limits in §20.2053-4(b)(2) and (c).

(vi) Effect of post-death events. If a deduction is claimed for the present value of a post-grace-period payment, the claimed deduction is subject to adjustment to reflect any post-death events affecting the amount of such post-grace-period payment and any change in the expected or actual date of payment. See paragraph (d)(2) of this section for the period during which post-death events are taken into account.

(vii) Exceptions. The rule in paragraph (d)(6)(i) of this section does not apply to unpaid principal of mortgages and other indebtedness deductible under §20.2053-7.

(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, unless otherwise provided, the claims against the estate are not deductible under §20.2053-4(b) or (c) and all amounts are paid during the grace period. The following examples illustrate the application of this paragraph (d):

(i) * * * However, any amounts that will not be paid on or before the third anniversary of the date of D’s death (that is, are not paid during the grace period) are subject to the present value limitation in paragraph (d)(6) of this section.

(ii) * * * If the amount of the claim will not be paid on or before the third anniversary of the date of D’s death (that is, the amount is not paid during the grace period), the amount deductible is subject to the present value limitation in paragraph (d)(6) of this section.

(iii) * * * 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, subject to the present value limitation in paragraph (d)(6) of this section, if applicable.

(iv) Example 4: Discounting amount paid more than three years after decedent’s date of death. The facts are the same as in paragraph (d)(7)(ii) of this section (Example 2) except that E files a timely protective claim for refund in accordance with paragraph (d)(5) of this section to preserve the estate’s right to claim a refund, a final judgment in the amount of $100x is entered against and paid by the estate precisely five years after D’s date of death, and the applicable Federal (mid-term) rate determined under section 1274(d) for the month in which D’s date of death occurs, compounded annually, is 2.00%. Within a reasonable period of time after the final judgment is entered, E notifies the Commissioner that the contingency has been resolved. E may claim a deduction for the present value of the amount paid in satisfaction of the claim as of D’s date of death. Under the facts in this paragraph (d)(7)(iv), the present value of the amount paid in five years equals $100x / (1 + .0200)⁵ or $100x/1.104081 or $90.57x.

(v) Example 5: Discounting amount to be paid when actual date of payment not known. The facts are the same as in paragraph (d)(7)(ii) of this section (Example 2) except that the claim is deductible under §20.2053-4(c) because all amounts deducted by the estate under that paragraph do not exceed $500,000. E obtains a written appraisal document meeting the requirements of §20.2053-4(c)(iv) and reasonably determines that the future value of the claim is $300,000 (that is, before discounting the claim to its present value). E determines, after considering all available information and making reasonable assumptions, that the expected date of payment of the claim is Date X, which is reflected in the appraisal. Date X is a date after the third anniversary of D’s date of death. E may claim a deduction for the present value of the claim as of D’s date of death, determined by discounting $300,000 for the period from the date of death to Date X, using the applicable Federal rate determined under section 1274(d) for the month in which D’s death occurs, compounded annually.

(vi) Example 6: Discounting amount to be paid for series of payments payable over a period that does not end on or before the third anniversary of the decedent’s death. Pursuant to the terms of a divorce and separation agreement entered on June 1 of Year 1, Decedent (D) is obligated to make annual payments of $100x to Claimant (C) on September 1 of year 1 and each September 1^st thereafter until D has made a total of 10 such payments. D dies on December 1 of Year 5 after having made the first five annual payments required under the agreement. The applicable Federal (mid-term) rate determined under section 1274(d) for the month in which D’s death occurs, compounded annually, is 2.00%. The executor of D’s estate (E) may 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 can be ascertained with reasonable certainty. E computes the discounted deductible amount of the claim by adding the undiscounted amount of the three payments that will be made before the third anniversary of D’s death ($300x) to the discounted amounts of the two payments that will be made after the third anniversary of D’s death. Accordingly, the amount deductible for the claim equals $483.866x ($300x + $92.843x + $91.023x). The individual calculations for the present values of the payments in the last two years of the payment obligation are shown in table 1 to this paragraph (d)(7)(vi).

 

* * * * *

(f) Applicability date. The rules of this section apply to the estates of decedents dying on or after [date of publication of the final in the Federal Register].

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

The addition and revision read as follows:

§20.2053-3 Deduction for expenses of administering estate.

* * * * *

(d) Interest expense incurred in administering the estate--(1) Interest payable under section 6601 on unpaid tax--(i) Section 6166 interest. As used in paragraph (d)(1) of this section, the phrase “section 6166 interest” means interest payable under section 6601 on unpaid estate tax deferred under section 6166. This includes interest accruing on an installment or other payment under section 6166 during the period of an extension of time for making that payment under section 6161(a)(2)(B). Section 6166 interest is not deductible pursuant to section 2053(c)(1)(D).

(ii) Non-section 6166 interest. As used in paragraph (d)(1) of this section, the phrase “non-section 6166 interest” means interest payable under section 6601 or under state or local law other than section 6166 interest. Non-section 6166 interest that accrues on or after the decedent’s date of death on any unpaid tax or penalties may be deductible to the extent permitted by §20.2053-1 and this section. For purposes of paragraph (d)(1) of this section, penalties include any unpaid additions to tax, additional taxes, and penalties. When non-section 6166 interest accrues on unpaid estate tax deferred under section 6161 or section 6163, the interest expense is actually and necessarily incurred in the administration of the estate for purposes of paragraph (a) of this section because the extension was based on a demonstrated need to defer payment. When non-section 6166 interest accrues on and after the date of a decedent’s death on any unpaid tax or penalties in connection with an underpayment of tax or a deficiency, the interest expense generally is actually and necessarily incurred in the administration of the estate for purposes of paragraph (a) of this section.

(iii) Exception. Notwithstanding paragraph (d)(1)(ii) of this section, non-section 6166 interest accruing on unpaid tax and penalties on and after the decedent’s date of death, whether in connection with a deferral, underpayment, or deficiency, is not actually and necessarily incurred in the administration of the estate for purposes of paragraph (a) of this section and is not deductible to the extent the interest expense is attributable to an executor’s negligence, disregard of applicable rules or regulations (including careless, reckless, or intentional disregard of rules or regulations) as defined in §1.6662-3(b)(2) of this chapter, or fraud with intent to evade tax. Interest expense is attributable to an executor’s negligence, disregard of applicable rules or regulations, or fraud with intent to evade tax to the extent that the underlying deferral, underpayment, or deficiency, is attributable to such conduct by the executor. Similarly, even when the underlying deferral, underpayment, or deficiency is not attributable to such conduct by the executor, the interest expense is attributable to an executor’s negligence, disregard of the rules or regulations, or fraud with intent to evade tax to the extent the subsequent accrual of interest is attributable to such conduct by the executor.

(iv) Examples. The following examples illustrate the application of this paragraph (d)(1). In each example, the decedent (D) dies on October 1, Year 1, and the estate tax return is due July 1 of the following calendar year, Year 2. In each example, except as expressly stated, there is no negligence, disregard of applicable rules or regulations, or fraud on the part of the executor.

(A) Example 1. On July 1, Year 2, the executor of D’s estate (E) timely files the estate tax return based on values determined in good faith and pays $500,000, which is the estate tax shown on the return. Upon examination, the Internal Revenue Service (IRS) makes an adjustment to the value of an asset includible in the gross estate, resulting in a $25,000 increase in estate tax due. E initially contests the adjustment, but eventually agrees to the assessment of the deficiency in the amount of $25,000. Interest on the deficiency is payable under section 6601 in the amount of $X. E makes a payment in satisfaction of the assessed deficiency and interest. For purposes of paragraph (a) of this section, the interest expense in the amount of $X is considered actually and necessarily incurred in the administration of D’s estate, and its deduction reduces the amount of the deficiency.

(B) Example 2. The executor of D’s estate (E) files the estate tax return and pays the estate tax shown on the return ($500,000) on July 1 of Year 3, one year after the due date. On August 1, Year 3, the IRS assesses interest on the unpaid tax under section 6601 in the amount of $X, assesses late filing and late payment penalties in accordance with section 6651 in the amount of $Y, and issues a notice and demand for payment of $X and $Y. On August 1, Year 4, E makes payment to the IRS of $Z, which is the total amount due for $X and $Y, as well as interest that accrued on these amounts from August 1, Year 3, to August 1, Year 4, payable under section 6601. The facts establish that E’s failure to timely file the return and timely pay the tax and failure to pay the assessed interest and penalties within the period provided in the notice and demand is a result of E’s disregard of the rules for filing the return and paying the tax and any assessed penalties. Under the facts in this paragraph (d)(1)(iv)(B), neither the interest payable under section 6601 that accrued on the unpaid tax before notice and demand nor the interest that accrued on the unpaid tax and penalties after notice and demand is an expense that is actually and necessarily incurred in the administration of D’s estate for purposes of paragraph (a) of this section.

(C) Example 3. Prior to D’s death, the IRS had assessed an income tax deficiency against D for the 2009 tax period in the amount of $75,000, and penalties in the amount of $X. The assessed tax and penalties remained unpaid on D’s date of death. On July 1, Year 2, the executor of D’s estate (E) timely files the estate tax return and timely pays the estate tax shown on the return to be due. On the same date, E also pays all claims against and liabilities of the estate, except for the assessed income tax deficiency and penalties for the 2009 tax period. Despite E’s awareness that the estate had sufficient liquidity and funds to satisfy all estate liabilities, including the 2009 income tax deficiency and penalties, E does not pay the assessed income tax deficiency, penalties, and accrued interest until July 1, Year 4. E’s failure to pay the assessed income tax deficiency and penalties for the 2009 tax period is a result of E’s disregard of applicable rules or regulations. Even though the underlying income tax deficiency is not attributable to E’s negligence, disregard of applicable rules, or fraud with intent to evade tax, the interest that accrued after July 1, Year 2, on the assessed deficiency and penalties is attributable to E’s disregard of applicable rules or regulations. Accordingly, the post-July 1, Year 2, interest is not an expense that is actually and necessarily incurred in the administration of D’s estate.

(2) Interest expense on certain loan obligations of the estate. Interest on a loan entered into by the estate to facilitate the payment of the estate’s tax and other liabilities or the administration of the estate may be deductible depending on all the facts and circumstances. To be a deductible administration expense, interest expense must arise from an instrument or contractual arrangement that constitutes indebtedness under applicable income tax regulations and general principles of Federal tax law. In addition, the interest expense and the loan to which interest expense relates must satisfy the requirement of §20.2053-1(b)(2) that they are bona fide in nature based on all the facts and circumstances. Further, both the loan to which the interest expense relates and the loan terms must be actually and necessarily incurred in the administration of the decedent’s estate and must be essential to the proper settlement of the decedent’s estate. See paragraph (a) of this section. If the facts and circumstances establish that the interest expense arises from an instrument or contractual arrangement that constitutes indebtedness under general principles of Federal tax law, factors that collectively may support a finding that the interest expense also satisfies the additional requirements under §20.2053-1(b)(2) and paragraph (a) of this section include, but are not limited to, the following:

(i) The interest rate on and the terms of the underlying loan (whether between related or unrelated parties), including any prepayment penalty, are reasonable given all the facts and circumstances and comparable to an arms-length loan transaction;

(ii) The underlying loan is entered into by an executor of the decedent’s estate acting in the capacity of executor or, if no executor is appointed and acting, the person accountable for satisfying the liabilities of the estate;

(iii) The lender properly includes amounts of paid and/or accrued interest (including original issue discount as determined under sections 1271 through 1275 and the regulations in this part under those sections, such as original issue discount attributable to stated interest that is treated as part of the stated redemption price at maturity because it is not payable at least annually) in gross income for Federal income tax purposes, particularly if the lender is a family member of the decedent, a related entity, or a beneficiary of the decedent’s estate or trust (as defined in §20.2053-1(b)(2)(iii));

(iv) The loan proceeds are used to satisfy estate liabilities that are essential to the proper settlement of the estate, including, but not limited to, the Federal estate tax liability;

(v) The loan term and payment schedule correspond to the estate’s anticipated ability to make the payments under, and to satisfy, the loan, and the loan term does not extend beyond what is reasonably necessary;

(vi) The only practical alternatives to the loan are the sale of estate assets at prices that are significantly below-market, the forced liquidation of an entity that conducts an active trade or business, or some similar financially undesirable course of action;

(vii) The underlying loan is entered into when the estate’s liquid assets are insufficient to satisfy estate liabilities, the estate does not have control (within the meaning of section 2701(b)(2)) of an entity that has liquid assets sufficient to satisfy estate liabilities, the estate has no power to direct or compel an entity in which it has an interest to sell liquid assets to enable the estate to satisfy its liabilities, and the estate’s assets are expected to generate sufficient cash flow or liquidity to make the payments required under the loan;

(viii) The estate’s illiquidity does not occur after the decedent’s death as a result of the decedent’s testamentary estate plan to create illiquidity; similarly, the illiquidity does not occur post-death as a deliberate result of the action or inaction of the executor who then had both knowledge or reason to know of the estate tax liability and a reasonable alternative to that action or inaction that could have avoided or mitigated the illiquidity;

(ix) The lender is not a beneficiary of a substantial portion of the value of the estate, and is not an entity over which such a beneficiary has control (within the meaning of section 2701(b)(2)) or the right to compel or direct the making of the loan;

(x) The lender or lenders are not beneficiaries of the estate whose individual share of liability under the loan is substantially similar to his or her share of the estate; and

(xi) The decedent’s estate has no right of recovery of estate tax against, or of contribution from, the person loaning the funds.

* * * * *

(f) Applicability date. The rules of this section apply to the estates of decedents dying on or after [date of publication of the final rule in the Federal Register].

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

1. Revising paragraphs (b)(1)(iv), (b)(2), and (c)(1)(iv) and (v), the second sentence of paragraph (c)(3), paragraph (d)(5), and paragraph (d)(7)(iii) introductory text.

2. In paragraph (d)(7)(iii), Examples 1 through 9 are designated as paragraphs (d)(7)(iii)(A) through (I), respectively.

3. In newly designated paragraph (d)(7)(iii)(A), removing “decision,” and “§20.2053-3(c) or §20.2053-3(d)(3)” adding “decision.” and “§20.2053-3(c) or (d)(3)” in their places, respectively.

4. In newly designated paragraphs (d)(7)(iii)(B) and (C), removing “payment,”, “Example 1”, and “§20.2053-3(c) or §20.2053-3(d)(3)” and adding “payment.”, “paragraph (d)(7)(iii)(A) of this section (Example 1)”, and “§20.2053-3(c) or (d)(3)” in their places, respectively.

5. In newly designated paragraph (d)(7)(iii)(D), removing “defendants,”, “Example 1”, and “§20.2053-3(c) or §20.2053-3(d)(3)” and adding “defendants.”, “paragraph (d)(7)(iii)(A) of this section (Example 1)”, and “§20.2053-3(c) or (d)(3)” in their places, respectively.

6. In newly designated paragraph (d)(7)(iii)(E), removing “payment,”, “Example 1”, and “§20.2053-3(c) or §20.2053-3(d)(3)” and adding “payment.”, “paragraph (d)(7)(iii)(A) of this section (Example 1)”, and “§20.2053-3(c) or (d)(3)” in their places, respectively.

7. In newly designated paragraph (d)(7)(iii)(F), removing “claims,” and “§20.2053-3(c) or §20.2053-3(d)(3)” and adding “claims.” and “§20.2053-3(c) or (d)(3)” in their places, respectively.

8. In newly designated paragraph (d)(7)(iii)(G), removing “enforceability,” and adding “enforceability.” in its place.

9. In newly designated paragraph (d)(7)(iii)(H), removing “estate,” and adding “estate.” in its place.

10. In newly designated paragraph (d)(7)(iii)(I), removing “satisfaction,” and adding “satisfaction.” in its place.

11. Adding paragraph (d)(7)(iii)(J).

12. Revising paragraph (f).

The revisions and addition read as follows:

§20.2053-4 Deduction for claims against the estate.

* * * * *

(b) * * *

(1) * * *

(iv) The value of each such claim against the estate is supported by a written appraisal document to be filed with the Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, or successor form, and the written appraisal document--

(A) Adequately reflects post-death events that have occurred prior to the date on which a deduction is claimed on an estate’s Form 706;

(B) Reports, considers, and appropriately weighs all relevant facts and elements of value as are known or are reasonably determinable at the time of the appraisal, including the underlying facts of the claim against the estate, potential litigating risks, and the current status of the claim and procedural history;

(C) Takes into account post-death events reasonably anticipated to occur;

(D) Identifies an expected date or dates of payment (for purposes of determining the applicability of the present value limitation in §20.2053-1(d)(6));

(E) Explains in detail the methods and analysis that support the appraisal’s conclusions;

(F) Is prepared, signed under penalties of perjury, and dated by a person who is qualified by knowledge and experience to appraise the claim being valued and is not a family member of the decedent, a related entity, or a beneficiary of the decedent’s estate or revocable trust (as those terms are defined in §20.2053-1(b)(2)(iii)), a family member of a beneficiary or a related entity as to a beneficiary (as those terms would be defined in §20.2053-1(b)(2)(iii) if references therein to the decedent were replaced with a reference to such beneficiary, and without regard to the limitations in §20.2053-1(b)(2)(iii) based on the decedent’s date of death), or an employee or other owner of any of them; and

(G) Includes a statement providing the basis for the person’s qualifications to appraise the claim being valued;

* * * * *

(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. See §20.2053-1(d)(6)(v) for the impact of the present value limitation.

* * * * *

(c) * * *

(1) * * *

(iv) The value of each such claim against the estate is supported by a written appraisal document to be filed with the Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, or successor form, and the written appraisal document--

(A) Adequately reflects post-death events that have occurred prior to the date on which a deduction is claimed on an estate’s Form 706;

(B) Reports, considers and appropriately weighs all relevant facts and elements of value as are known or reasonably determinable at the time of the appraisal, including the underlying facts of the claim against the estate, potential litigating risks, and the current status of the claim and procedural history;

(C) Takes into account post-death events reasonably anticipated to occur;

(D) Identifies an expected date or dates of payment (for purposes of determining the applicability of the present value limitation in §20.2053-1(d)(6));

(E) Explains in detail the methods and analysis that support the appraisal’s conclusions;

(F) Is prepared, signed under penalties of perjury, and dated by a person who is qualified by knowledge and experience to appraise the claim being valued, and is not a family member of the decedent, a related entity, or a beneficiary of the decedent’s estate or revocable trust (as those terms are defined in §20.2053-1(b)(2)(iii)), a family member of a beneficiary or a related entity as to a beneficiary (as those terms would be defined in §20.2053-1(b)(2)(iii) if references therein to the decedent were replaced with a reference to such beneficiary, and without regard to the limitations in §20.2053-1(b)(2)(iii) based on the decedent’s date of death), or an employee or other owner of any of them; and

(G) Includes a statement providing the basis for the person’s qualifications to appraise the claim being valued;

(v) The total amount deducted by the estate under paragraph (c) of this section does not exceed $500,000 (see §20.2053-1(d)(6)(v) for the impact of the present value limitation);

* * * * *

(3) * * * Assume that each claim is paid within three years after the decedent’s death, and that the value of each claim is determined from a written appraisal document that meets the requirements of paragraph (c)(1)(iv) of this section. * * *

(d) * * *

(5) Claims founded upon a promise--(i) In general. To be deductible, a claim founded on a promise must represent a personal obligation of the decedent existing at the time of the decedent’s death, and the claim must be enforceable against the decedent’s estate. In addition, except with regard to pledges or subscriptions (see §20.2053-5), 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 money value.

(ii) Decedent’s promise to guarantee a debt. A deduction for a claim founded upon a decedent’s agreement to guarantee a debt of another is a claim founded on a promise and is subject to the limitation in paragraph (d)(5)(i) of this section. For purposes of section 2053, a decedent’s agreement to guarantee a debt of an entity in which the decedent had an interest at the time the guarantee was given satisfies the requirement that the agreement be in exchange for adequate and full consideration in money or money’s worth if, at the time the guarantee was given, the decedent had control (within the meaning of section 2701(b)(2)) of the entity. Alternatively, this requirement is satisfied to the extent the maximum liability of the decedent under the guarantee did not exceed, at the time the guarantee was given, the fair market value of the decedent’s interest in the entity. The bona fide nature of the decedent’s agreement to guarantee a debt of a family member, a related entity, or a beneficiary (as defined in §20.2053-1(b)(2)(iii)) is determined in accordance with §20.2053-1(b)(2)(ii). For a claim otherwise deductible under this paragraph (d)(5)(ii), the estate’s right of contribution or reimbursement will reduce the amount deductible in accordance with §20.2053-1(d)(3). Payments made pursuant to the decedent’s guarantee of a debt are deductible only to the extent that the debt for which the guarantee is given has not been taken into account in computing the value of the gross estate under §20.2053-7 or otherwise.

* * * * *

(7) * * *

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

* * * * *

(J) Example 10: Guarantee. On Date 1, D entered into a guarantee agreement with Bank (C) to secure financing for a closely-held business (LLC) in which D had a controlling interest. LLC was solvent at the time LLC executed a promissory note in the amount of $100x in favor of C. Prior to D’s death, LLC became insolvent and stopped making payments on the note. After D’s death, C filed a claim against D’s estate for payment of the remaining balance due under the note and E paid the full amount due. Although E had a right of contribution against LLC for primary payment of the indebtedness, LLC was insolvent and no part of the debt was collectible at the time E deducted the payment. D’s estate may deduct the amount paid to C in satisfaction of D’s liability under the guarantee agreement. The guarantee agreement is considered to have been contracted for an adequate and full consideration in money or money’s worth. The result would be the same if D did not have control of LLC as long as the fair market value of D’s interest in the LLC on Date 1 was at least $100x.

* * * * *

(f) Applicability date. The rules of this section apply to the estates of decedents dying on or after [date of publication of the final rule in the Federal Register].

Paul J. Mamo,

Acting Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on June 24, 2022, 4:15 p.m., and published in the issue of the Federal Register for June 28, 2022, 87 F.R. 38331)