Tax Law

IRS Issues Proposed Rules Clarifying Alternate Valuation Rules

The executor can elect to value property in the decedent's estate at the alternate valuation date in an effort to reduce the estate's tax liability. IRC § 2032. The alternate valuation election is provided solely to mitigate the hardship on an estate due to declining market values. A voluntary postmortem act of a surviving spouse, trustee or executor that results in a reduction of value is not to be considered in determining the alternative value of the property.  If the estate elects to use alternate valuation, the estate's assets are valued either six months after the date of death or as of the date of sale, exchange, distribution, or other disposition.

On November 18, 2011, the IRS issued Proposed Treasury Regulations (76 FR 71491), that clarify the meaning of "distributed, sold, exchanged, or otherwise disposed of" by providing a list of transactions that constitute distributions, sales, exchanges or dispositions of property.  Prop Treas Reg § 20.2032-1(c)(1)(i).   The Proposed Regulations then go on to provide two exceptions.  If one of the exceptions applies, then the estate may value the asset on the six-month date.  The first exception applies to transactions where the estate's interest in a corporation, partnership or other entity is exchanged for one or more different interests in the same entity or in an acquiring or resulting entity.  Prop Treas Reg 20.2032-1(c)(1)(ii). The second exception applies to distributions from a business entity, bank account, or retirement trust and an interest in that entity is included in the gross estate. Prop Treas Reg 20.2032-1(c)(1)(iii)(A).  The Proposed Regulations set forth an aggregation rule for determining the value of property that is, or is deemed to be, distributed, sold, exchanged or disposed of but remains in the gross estate on the six month date. Prop Treas Reg § 20.2032-1(c)(1)(iv).

The Proposed Regulations also provide a rule for determining which portion of a trust is included in the estate because of retained interest. Prop Treas Reg § 20.2032-1(c)(iii)(B). The Proposed Regulations clarify when property that passes by contract or operation of law is deemed to be distributed, sold, exchanged or distributed.  Prop Treas Reg § 20.32-1(c)(2).With respect to post-death events, if Congress determines that a post-death event has occurred on the decedent's date of death, the post-death event will not result in a distribution, sale, exchange, or distribution. Prop Treas Reg § 20.2032-1(c)(4).

The Proposed Regulations provide various examples illustrating the new provisions.  Prop Treas Reg § 20.2032-1(c)(5).

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