News Briefings - Estate Planning

The following article was taken from the May 2008 issue of Estate Planner's Alert.

5/12/08 -- Only market conditions could reduce value under proposed alternate valuation regs

IRS has issued proposed regs that would make it clear that only market conditions could cause a reduction in estate tax values when an estate make an alternate valuation election under Code Sec. 2032. Under these regs, which would apply to estates of decedents dying after April 24, 2008, other post-death events could not reduce estate tax values under alternate valuation. (Preamble to Prop Reg, 04/24/2008; Prop Reg § 20.2032-1)

RIA observation: This change was no doubt motivated by the Tax Court's decision in Kohler, TC Memo 2006-152. In that case, the Tax Court held that Code Sec. 2032 allows a discount for transfer restrictions and a purchase option imposed on closely-held corporate stock pursuant to a post-death tax-free reorganization in determining the fair market value of the decedent's stock on the alternate valuation date. IRS has nonacquiesced in Kohler. (AOD 2008-001, 03/04/2008; see Estate Planner's Alert, April 2008)

Background. In general, the value of a decedent's gross estate is determined as of the date of death. (Code Sec. 2031) However, under Code Sec. 2032(a), the value of the gross estate instead may be determined, if the executor elects, by valuing all the property included in the gross estate as follows:

... Property distributed, sold, exchanged, or otherwise disposed of within six months after the decedent's death must be valued as of the date of distribution, sale, exchange, or other disposition. (Code Sec. 2032(a)(1))

... Property not distributed, sold, exchanged, or otherwise disposed of within six months after the decedent's death must be valued as of the date that is six months after the decedent's death. (Code Sec. 2032(a)(2))

Any interest or estate which is affected by the mere lapse of time is included at its value as of the time of death (instead of the later date), with adjustment for any difference in its value as of the later date that is not due to the mere lapse of time. (Code Sec. 2032(a)(3)) Reg § 20.2032-1(f) restates this rule and provides an example that illustrates the rule that only changes in the value of the decedent's gross estate due to market conditions, and not changes to the value due to a mere lapse of time, are to be considered in valuing the decedent's gross estate under the alternate valuation method.

In Flanders, Anita Trust v. U.S., (1972, DC CA) 30 AFTR 2d 72-5872, the district court held that the reduction in value of property included in the decedent's estate as a result of a voluntary act by the trustee, instead of as a result of market conditions, could not be taken into consideration in valuing the property under the alternate valuation method. As noted above, in Kohler, the Tax Court allowed a voluntary post-death event to be taken into account in determining value under alternate valuation.

Proposed regs. The proposed regs would restructure Reg § 20.2032-1(f) to clarify that the election to use the alternate valuation method is available to estates that experience a reduction in the value of the gross estate following the date of the decedent's death due to market conditions, but not due to other post-death events. The proposed regs would define "market conditions" as events outside of the control of the decedent (or the decedent's executor or trustee) or other person whose property is being valued that affect the fair market value of the property being valued. (Prop Reg § 20.2032-1(f)(1)) The proposed regs would include examples (Prop Reg § 20.2032-1(f)(3)(ii)), which IRS says are not intended to be exclusive. (Preamble to Prop Reg, 04/24/2008)

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