Comment on FR Doc # E7-07601

CC:PA:LPD: PR (REG-143316-03) Room 5203 Internal Revenue Service P.O. Box 7604 Ben Franklin Station Washington, D.C. 20044 Re: RIN 1545BC56 (REG-14331603) Dear IRS: I am writing to formally lodge my response to the proposed regulations under Section 2053, RIN 1545BC56 (REG-14331603); FR DOC 0001-0011, to provide that estate tax deductions under Section 2053(a) are limited to amounts actually paid. Sadly, I must respectfully object to these proposals, for the reasons listed below and those detailed in the attached. These reasons include but are not limited to: 1. The IRS provides no cogent explanation of why the 8th Circuit should be preferred to the US Supreme Court. A logical, reasonable assumption would think the IRS would strive mightily to comply with the Supreme Court and not reject it for a lower court. Why does the IRS allow the lower court to trump the Supreme Court? 2. While there may be a conflict in the circuits, the IRS is an administrative agency obligated to abide by and follow the law, including court rulings as to that law. If there is a conflict in the circuits, it must apply the law differently, depending on the circuit. 3. The IRS alleges it reviewed relevant legislative history as to Section 2053 or its predecessors. In eighty years of the IRS litigating this issue, no court has ever cited or quoted any relevant legislative history. What history is there? 4. The IRS position is contrary to Section 2053. a. Section 2053(d) limits a deduction for foreign estate taxes to amounts ?actually paid?. This actual payment requirement was added in 2001, after the IRS lost Estate of Smith, 198 F.2d 515 (5th Cir. 1999), and issued its non-acquiescence (nonacq. 2000-19 IRB), where the court held that Section 2053 (a) deduction was not limited to actual payments. To add that limitation to Section 2053(a) is contrary to the statute and adds that which Congress manifestly did not. b. Section 2053(a) allows deductions for ?claims?. The IRS proposals effectively change the deduction for ?claims against the estate? to ?finally determined as valid claims against the estate?. By requiring actual payment, the proposed regulations require that some party (a court, an arbitrator, a governmental agency, or perhaps the estate settling or agreeing to the liability) make a final determination that the estate is liable, and how and in what manner that payment will occur. That is not a ?claim?, but a final judgment or ruling. 5. These proposals are contrary to the excise nature of the estate tax. a. The IRS states: ?The rationale for [Section 2053] is that those expended portions of the gross estate are not transferred to the decedent?s legatees, beneficiaries, or heirs.? In other words, the IRS position is that the estate tax is based on what the legatees receive (see Schiffman v. United States, 51 F. Supp 728, 732 (Cl. Ct. 1943); Estate of Chesterton, 551 F.2d 278 (Ct. Cl. 1977)) or what actually passes to the living (see Estate of Cafaro, 57 TCM 1002 (1989)). Thus, under these proposed regulations the estate tax is imposed on what the estate transfers to the beneficiaries. See Estate of Shivley, 276 F.2d 372. To treat the estate tax as a tax on property received, as the IRS does in these proposed regulations, construes the estate tax a succession tax, a tax on the fruits of the estate or what the estate transfers. b. However, the estate tax is an excise tax, and is imposed on what the decedent transfers. See Knowlton v. Moore, 178 U.S. 41 (1900); United States v. Manufacturers National Bank of Detroit, 363 U.S. 194, 198 (1960); IRC ?2001. That is, the ?estate tax is not levied upon the property of which an estate is composed. It is an excise imposed upon the transfer of or shifting in relationships to property at death.? U.S. Trust Co. v. Helvering, 307 U.S. 57, 60 (1939); Chase National Bank v. United States, 278 U.S. 327, 334-36 (1929) (estate tax is on ?shifting of the economic benefits and burdens?). Thus, the estate tax is levied on the change in economic rights, not its tangible fruit, that is, not on the property received. See Tyler v. United States, 281 U.S. 497, 502-03 (1930). Because the benefits and burdens are considered, the estate tax is on the transfer of the ?net estate?. See United States v. Mitchell, 74 F.2d 571, 575 (7th Cir. 1934); Estate of Simplot, 249 F.3d 1191, 1194-95 (9th Cir. 2001); Estate of Smith, 198 F.2d 515 (5th Cir. 1999). c. Furthermore, by taxing the estate?s property, the IRS proposals raise grave concerns about making the estate tax a direct tax on property. If it is a direct tax, the estate tax is unconstitutional as it is not apportioned. See U.S. Const. Art I, ?2. d. Also, these proposals adopt the assertion by the dissent in Estate of Hubert, 520 U.S. 93 (1996), that: ?The provisions of the estate tax ? do not sharply discriminate between date-of-death and postmortem events insofar as the allowance of deductions for claims against and obligations of the estate are concerned.? Id. at 134 (Scalia, J. dissenting) (italics added). That is the dissents? position, not the plurality?s position. 6. These proposals are contrary to other estate tax statutes and the estate tax regime, some of which are described below. a. Limiting the deduction to amounts actually paid is inconsistent with other estate tax statutes, such as Sections 2013, 2032, 2032A, 2053(d), 2054, 2055, 2056, 2057, 2058, 6166, and the truth that ?when Congress wants to derogate from the date-of-death valuation principle it knows how to do so.? Estate of Smith, 198 F.3d at 524. Congress did not derogate from date of death valuation in Section 2053(a), as it did in Section 2053(d), and yet the regulations do this derogation. b. The whole scheme designed by the proposed regulations essentially mimics Section 2058, except there is no time limitation under these proposals. Thus, Congress knew how to do what these proposals attempt to do, but Congress did not do that with respect to Section 2053(a). To do so is an impermissible mutating of Section 2053(a) into Section 2058. c. The deduction for claims, expressly provided by statute, is eliminated from the estate tax return when the claim is pending at the time of filing the return. Yet, the duty to file a return is the duty to file a complete return, not an incomplete return. Regulations should not be drafted to eliminate a statutory deduction. d. These proposals destroy the statute of limitations. For instance, under these regulations, payments to a former spouse that are contingent on that person not remarrying are not deductible until actually paid, which incidentally attempts to overrule Commissioner v. State Street Trust Co., 128 F.2d 618 (1st Cir. 1942). That means deductions may not be allowed until decades after death, and estate tax returns could remain open for decades, thereby defeating the statute of limitations. 7. The rebuttable presumption of denying a claim between related parties is essentially the family attribution rule rejected in Estate of Bright and numerous other cases. When Congress wanted family attribution rules to be relevant in the estate tax regime, it adopted Chapter 14. Adding that requirement to Section 2053 has no explicit support in that statute. It might be noted that if the claim is valid, the presumption will always be overcome, and if a sham or a device to impermissibly reduce or avoid estate taxes, the presumption would never be overcome. See generally Welch v. Helvering, 290 U.S. 111 (1933); Tax Court Rule 142(a). 8. Finally, the IRS has not explained how the system proposed by the regulations would work. There are many unanswered questions. For example, let?s use the following example: Assume a decedent dies, survived by a U.S. citizen spouse and adult children. His estate plan, using a marital formula deduction, established a QTIP (2056(b)(7)) Trust for the spouse, with other portion being distributed outright to the children, and that there is an outstanding claim against the decedent at date of death. The decedent?s gross estate is $4M, the applicable exclusion amount is $2M, and because the 2053(a)(3) deduction is zero, the marital formula establishes a $2M QTIP Trust. The estate files a protective claim before the statute of limitations run, and 5 years after filing this claim, $500,000 is paid under that claim. a. What happens to the QTIP Trust upon payment? Under the formula, it would be reduced by $500,000 (perhaps discounted to date of death values?) (that is the 2053(a) deduction, after all). Is the ability of the fiduciary to resolve the claim and distribute funds to the children the ability to appoint property to someone other than the surviving spouse, thereby making the QTIP Trust not qualify for the marital deduction? If the QTIP Trust has to pay property over to the children, is the property still included in the surviving spouse?s estate? As the amount owed to the children is a number and not particular assets, is the ability to pick and choose a gift? Is the date of death value or current value used? If there is litigation about this issue, is that an administration expense deductible on the decedent?s estate tax return? What are the state law implications? b. Who files the claim? The court appointed executor may have been discharged or the fiduciary may not be acting or even alive at the time a claim is paid. c. What does the IRS do if different parties file the claim for refund, each alleging to be the proper payee? d. If a child dies while the claim is still pending, is not the right of recovery an asset of the child?s estate? Given that the child?s estate would value that right at date of death, the decedent?s estate could value that right as well. It is the same right. The IRS position creates completely different results for the same issue, same facts, same everything, just different sides of the same coin. e. What if a child received some IRD assets and took a Section 691 deduction. Is the income tax return amended subsequently if the claim is paid? Are interest and penalties due if there must be an amendment? What if the income tax statute of limitations has run? How would the child or IRS know of the decrease in estate taxes owed? f. Does an estate (or a trust under a Section 645 election) remain open while the claim is pending? Is it terminated as unduly prolonged? g. Is a Section 6161 election available if the estate needs its liquid assets to defend the claim, and paying the estate tax effectively hinders or defeats its ability to defend the claim? What are the factors the IRS would consider in such a situation? h. How would the Section 6166 or Section 2057 election work in this situation? i. Or the Section 2032A election? Is the payment of a claim within the six months equal to a reduction in tax for purposes of this statute? j. Can the estate amend its estate tax return to change GST Exemption allocation if the payment on the claim affects property passing, currently or in the future, directly or indirectly, to skip persons? k. What if, instead of passing to a spouse, the decedent?s estate had a formula deduction to a private foundation? Must the charity account for the potential refund in its accounting? If the charity does refund or return assets, is that a violation of the private foundation rules or other rules applicable to charities? l. What is the effect of filing a protective claim anyway? Is the statute of limitations extended indefinitely? Is the only issue (barring some other audit or litigation) extended for purposes of this statute the amount of the refund? Is the whole return open to reexamination? Are administration expenses relating to filing the claim also deductible? These are just some questions raised by the IRS proposals, none of which have yet to be answered. Before finalizing its proposals, these questions (and others similar to them) need to be answered. Instead of the position advanced by the proposed regulations, I believe that the only way to effectuate the will of Congress and properly apply the law is for the IRS to adopt the position of the Estate of Smith, 198 F.2d 515 (5th Cir. 1999), and value the deduction based on its value at date of death (or alternate valuation date). Thus, the deduction is not the amount a plaintiff seeks in some letter or filed pleading or the potential maximum due under a guarantee, nor is it unknown until paid. Rather, similar to valuations of claims that are assets, or claims against specific assets, claims against the estate are valued based on the facts and circumstances known at date of death. Post-death events are irrelevant. The amount actually paid is irrelevant. Only the date of death value is relevant. All of the questions raised above become moot. I want to participate in the public hearing on these proposed regulations scheduled for 10:00 a.m. on Monday, August 6, 2007, at 10:00 a.m. EST. As I will be unable to attend physically, I hope that the there is a way to allow me to participate by telephone. Please let me know. Michael Gerson mgerson@aklaw.net Allen & Kimbell, LLP 317 E. Carrillo Street Santa Barbara, CA 93101 (805) 963-8611