IRS Reissues Alternative Valuation Date Proposed Regulations

The IRS issued new proposed regulations November 17 (REG-112196-07) on electing an alternate valuation date for an estate and withdrew earlier ones released in 2008.

The proposed regulations as reissued would limit the ability of estates to use the alternate valuation method if the value of the estate declines after the decedent’s death. The proposed regulations were first issued in April 2008 and were withdrawn in response to comments from parties including the AICPA.

Sec. 2032(a) allows executors to elect to value an estate on the date that is six months after the date of death. Any property distributed, sold, exchanged or otherwise disposed of during the six months is valued as of the date of its disposition. However, any interest whose value changes by merely the lapse of time is valued as of the date of death, with an adjustment allowed for any difference in value due to any factor other than the lapse of time (Sec. 2032(a)(3)).

When initially proposed, the regulations provided that the election was available only where the estate’s gross value declines during the alternate valuation period due to market conditions and not “post-death events” or the mere lapse of time. “Market conditions” were defined as events outside the control of the decedent or the executor that affect the fair market value of the property includible in the gross estate. The 2008 proposed regulations defined “post-death events” as including a reorganization of an entity in which the estate holds an interest, a distribution from such an entity to the estate, or a distribution from the estate of such an interest or portion of it.

The proposed regulations as revised specify that, if Congress has by statute deemed that a post-death event occurs on the decedent’s date of death, that event will not result in a distribution, sale, exchange or other disposition of the property for purposes of the alternate valuation date. Currently, only the granting of a qualified conservation easement under Sec. 2031(c) satisfies this requirement.

Other provisions in the proposed regulations provide:

• Two exceptions to the general rule that property disposed of or otherwise subject to a transaction during the alternate valuation period is valued as of the transaction date: (1) when an interest in a corporation, partnership or other entity includible in the decedent’s gross estate is exchanged for a different interest in the same entity or an acquiring entity, and (2) where the estate receives a distribution from a business entity, bank account or retirement trust and an interest in the entity or account is includible in the gross estate. In both these cases, the estate may use the alternate valuation date, under certain conditions.
• An aggregation rule for the value of each portion of property that is disposed of or deemed to have been disposed of during the alternate valuation period but remains in the gross estate on the alternate valuation date.
• A special rule for determining the portion of a trust includible in the gross estate as of the alternate valuation date by reason of a retained interest.
• A clarification of when property is deemed to be disposed of where its title passes by contract or operation of law.

The proposed regulations (except for portions restating existing regulations for clarity) will be effective for estates of decedents dying on or after the date of their publication as final in the Federal Register. A public hearing is scheduled for March 9, 2012, at the IRS Building in Washington.