# Prop. Treas. Reg. § 20.2053-1: Deductions for expenses, indebtedness, and taxes; in general. Proposed regulation, not in force. REG-130975-08, 87 FR 38331, published 2022-06-28 . Interprets 26 U.S.C. § 2053. Accordingly, the Treasury Department and the IRS propose to amend the regulations under section 2053 to require the discounting to present value of certain amounts paid or to be paid in settlement or satisfaction of certain claims and expenses in determining the amount deductible under section 2053. Specifically, the rule in these proposed regulations requires calculating the present value of the amount of a deductible claim or expense described in section 2053(a) and § 20.2053-1(a) that is not paid or to be paid on or before the third anniversary of the decedent's date of death, which three-year period the proposed regulations define as the “grace period.” The proposed regulations provide the general formula for calculating the present value of such amounts and state that the discount rate to be used in the calculation is the applicable Federal rate determined under section 1274(d) for the month in which the decedent's date of death occurs, compounded annually. The length of time from the decedent's death to the date of payment or expected date of payment will determine whether the Federal rate applicable to that amount is the Federal mid-term rate or the Federal long-term rate. The proposed regulations provide that any reasonable assumptions or methodology in regard to time period measurements may be used in calculating the present value. In addition, the proposed regulations require a supporting statement to be filed with the Form 706 showing any calculations of present value. 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: * * * * * (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 × [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 1st 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). **Table 1 to Paragraph ( d )(7)( vi )** | | (1) | t | (2) | 1 + i | (3) | 1/(1 + i) | (4) | [1/(1 + i)] t | (5) | [1/(1 + i)] t × 100x | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Year 9 | 3.75 | 1.0200 | 0.980392 | 0.928430 | 92.843x | | | | | | | Year 10 | 4.75 | 1.0200 | 0.980392 | 0.910226 | 91.023x | | | | | | * * * * * (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 ].