Comments on Proposed Regulations on Exclusion Amount Changes

[The following is the text of the comments (with some corrections for typographical errors) I have submitted to the Treasury Department on the proposed regulation that addresses changes in the federal estate tax exclusion amount under the tax reconciliation act of 2017, often known as the Tax Cuts and Jobs Act. These and other comments can be found on the website.]

February 21, 2019

CC:PA:LPD:PR (REG–106706–18)
Internal Revenue Service, Room 5203
P.O. Box 7604, Ben Franklin Station
Washington, DC 20044

Via (IRS REG-106706-18)

Re:      Comments on Proposed Regulations;
83 F.R. 59343 (11/23/2018)

Dear Sirs and Madams:

I am submitting the following comments regarding the proposed amendments to Treas. Reg. § 20.2010-1.


I oppose the adoption of Prop. Reg. § 2010-1(c), and ask that the proposed regulation be withdrawn, and that a new regulation be proposed and adopted that would provide that the “aggregate amount of tax which would have been payable under chapter 12” in accordance with I.R.C. § 2001(b)(2) be calculated for the deaths of decedent dying after 2025 without regard to I.R.C. § 2010(c)(3)(C) (i.e., as though the $10 million basic exclusion amount had never been enacted).

I also ask that similar gift tax regulations be proposed and adopted to make a similar change in the calculation of “the sum of the amounts allowable as a credit to the individual under this section for all preceding calendar periods” in accordance with I.R.C. § 2505(a)(2), so that after 2025 the amounts previously allowed as a credit would be recalculated without regard to I.R.C. § 2010(c)(3)(C) (i.e., as though the $10 million basic exclusion amount had never been enacted).

My Background

I have been practicing law in the area of estates and trusts for more than forty years and am, among other things, a fellow of the American College of Trust and Estate Counsel and a past chair of the Real Property, Probate and Trust Law Section of the Pennsylvania Bar Association.

While practicing law, I have also been constructing electronic spreadsheets and writing computer programs for calculating estate and gift taxes, and writing books and articles about the mathematics of estate tax calculations.  For example, I have served as a technical consultant to Leimberg & LeClair, publishers of the NumberCruncher program for tax and financial calculations, and have most recently begun publishing “Webcalculators” (http//, which is my own “cloud based” on-line tax and financial calculator.

Additional information about my writings, background, and experience can be found at

The comments below are entirely my own, and should not be taken to represent the views of any other individual or organization.

Proposed Regulations

So that these comments may be as concise as possible, I will not restate the information about the mechanics of gift estate tax calculations and legislative history that is found in the “supplementary information” included with the proposed regulations, and I will presume that the reader is familiar with the issues presented by that supplementary information and the proposed regulations.  (I will also try to use the same terminology used in the proposed regulations.)

I generally agree with the explanations and information in the supplementary information.  However, the examples that are provided all speak exclusively in terms of a basic exclusion amount (BEA) of either $5 million or $10 million, and do not include any examples with the adjustments for inflation that have been made to the BEA in the past, are in effect today, and will be made in the future in accordance with I.R.C. § 2010(c)(3)(B).  As explained below, the inclusion of inflation adjustments in the examples will expose issues that need to be considered, and should addressed by the regulations.

Specifically, I agree that the increase in the BEA does not cause any problems, as explained in sections V.2 and V3 of the supplementary information (83 F.R. at 59345).  However, the proposed regulation eliminates any increase in estate tax caused by the decrease in the BEA only if you either (a) ignore future inflation adjustments or (b) assume that donors who make gifts that take advantage of the increased BEA during the “increased BEA period” (decedents dying, and gifts made, after December 31, 2017, and before January 1, 2026) should not be entitled to any benefit from any inflation adjustments to the $5 million BEA following the end of the increased BEA period, because the proposed regulation will eliminate or greatly restrict the benefit of those future inflation adjustments.

Inflation Adjustments

The proposed regulation would eliminate any estate tax after the end of the increased BEA period on lifetime gifts in excess of the BEA, but it would also eliminate any benefit for inflation adjustments to the BEA after gifts are made that exceed the $5 million BEA, at least until the inflation adjustments to the BEA exceed the total of the gifts made that were sheltered from gift tax by the $10 million BEA.

To illustrate, assume that an individual, “A,” who is not married and has never been married (so there is no DSUE), makes $12 million in taxable gifts in 2018, when the BEA (adjusted for inflation) is $11,180,000  A would pay gift tax of $328,000 on the $820,000 of gifts in excess of the BEA.  In 2027, after the BEA has returned to $5 million, the BEA could be $6,580,000 after adjusting for inflation of about 1.8% per year.  If A dies in 2027 with a taxable estate of $1,000,000, the BEA for A’s estate would be $11,180,000 under the proposed regulation, which would eliminate any estate tax on the lifetime gifts.  But the entire $1,000,000 taxable estate would be subject to estate tax, resulting in a tax of $400,000, even though there were inflation adjustments to the BEA after the gifts were made in 2018 and after the $10 million BEA ended after 2025.  If the $10 million BEA had not been enacted, a 1.8% inflation rate would have resulted in a BEA of $6,340,000 in 2025, and there would be additional BEA increases of $120,000 in both 2026 and 2027, and yet that total increase of $240,000 would have no effect on the calculation of the decedent’s estate tax.

Not having the benefit of inflation adjustments after the BEA reverts to $5 million is contrary to previous tax policy, because normally a donor is entitled to increases in the BEA even after gifts have been made that have used up the BEA.  So, for example, when the BEA increased from $5,450,000 in 2016 to $5,490,000 in 2017, donors could make tax-free taxable gifts of $40,000 even if they had already used up the exclusion of $5,450,000 in 2016.

There are several references to inflation adjustments in both the supplementary information and the proposed regulations themselves, and yet none of the examples in the proposed regulations use an inflation-adjusted BEA and so only refer to a $5 million or $10 million BEA.  It is therefore not clear whether the effect of the proposed regulations on tax calculations with inflation adjustments was not considered, or was considered and the decision was made that the effect of inflation adjustments should be ignored.

The “Prior Gifts” Alternative

An alternative to adjusting the BEA for a decedent dying after 2025, as in the proposed regulations, is to adjust how the “gift tax payable” on lifetime gifts is calculated under I.R.C. § 2001(b).  (And this may have been what Congress was contemplating when it enacted § 2001(g)(2), which refers to regulations on the difference between the exclusion at the decedent’s death and the exclusion applicable to gifts by the decedent.)

Briefly, regulations could provide that, when the gift tax payable on lifetime gifts is recalculated in accordance with § 2001(b)(2) for deaths after 2025, the BEA that is used for each year of those calculations should be the BEA that would have been in effect (including adjustments for inflation) if the $10 million basic exclusion amount had never been enacted.

There is legislative history that supports this approach.

When the BEA was increased to $5 million by the Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation Act of 2010, the increase was still subject to the “sunset” provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), and there was a concern by practitioners and commentators that there would be estate tax on gifts made using that increased BEA if Congress allowed the increase to lapse.  The estate tax would be the result of the same problem discussed in the explanations of the proposed regulations, and was often called a “clawback” tax on the gifts.  However, the sunset provision of EGTRRA stated that, if the changes made by that act ceased to apply, the Internal Revenue Code would then be applied and administered as though the changes “had never been enacted.”  If the “gift tax payable” on lifetime gifts is calculated under section 2001(b) as though the $5 million exclusion amount had never been enacted, then the gift tax payable would be calculated using a $1 million BEA instead of a $5 million BEA, and the resulting (hypothetical) gift tax would eliminate any “clawback” tax on lifetime gifts that used the larger BEA.  For additional explanations and examples, see my articles “Complications from Changes in the Exclusion,” Steve Leimberg’s Estate Planning Newsletter # 1768 (1/31/2011), and “Clawback Has No Teeth,” Steve Leimberg’s Estate Planning Newsletter #1729 (2/23/2012), copies of which are attached.

Although not specifically required by statute, because there is no similar “sunset” language for § 2010(c)(3)(C), this same approach should be applied to the temporary increase in the BEA.

If the gift tax payable on lifetime gifts made using the $10 million BEA is recalculated after 2025 using the $5 million BEA (i.e., the BEA that would have applied if § 2010(c)(3)(C) had never been enacted), then the estate tax on lifetime gifts is eliminated, and the estate would get the benefit of any inflation increases to the BEA that might have occurred after the gifts.

So, going back to the example above of a $12 million gift in 2018, and the decedent’s death in 2027 with a $1 million estate, the BEA in 2018 would have been $5,600,000 if the BEA had not been increased to $10 million.  If that BEA is used the calculate the gift tax payable on the $12 million gift for purposes of calculating the estate tax in 2027, then the gift tax would be $2,560,000 instead of $328,000, and the estate tax on the $1,000,000 estate would be $8,000 instead of $400,000.  Of the tentative tax base of $13 million ($12 million gift plus $1 million taxable estate), $6,400,000 ($12,000,000 gift less presumed BEA of $5,600,000 in 2018) would be sheltered by having been subject to gift tax in 2018, and $6,580,000 would be sheltered by the BEA in 2027, leaving only $20,000 subject to estate tax.

Even if it is determined that donors should not get any benefit from unused inflation adjustments before 2026, but only inflation adjustments after 2025, it is still possible to achieve that result by recalculating the gift tax payable for taxable gifts before 2026 using either the BEA that would have been in effect at the end of 2025 if the $10 million BEA had not been enacted.  Using the same inflation adjustments described above, the BEA would have been $6,340,000 in 2025 if the $10 million BEA had never been enacted.  If the gift tax payable on the 2018 gift of $12 million is recalculated using that BEA instead of the $11,180,000 BEA in effect in 2018, the gift tax payable would be $2,264,000, and the estate tax on the $1,000,000 estate would be $304,000 instead of the $400,000 required by the proposed regulations.  In effect, the estate would get the benefit of the $240,000 increase in the BEA in 2026 and 2027, which would reduce the estate tax by $96,000 (40% of $240,000).

The Alternative Is More Appropriate

The prior gifts alternative described above is the more appropriate regulatory solution, and should be adopted in lieu of the proposed regulation, for the following reasons:

  • It is more consistent with the statutory language of § 2001(g)(2), which authorizes regulations to carry out “this section” with respect to differences in the exclusion amount.  The direction to reduce the estate tax for the gift tax payable on lifetime gifts is part of § 2001(b)(2), and so the prior gifts alternative can be carried out within the literal authorization of § 2001(g)(2), while the proposed regulations under § 2010 cannot.
  • It is more consistent with the existing framework of estate tax calculations, which generally attempt to adjust for the estate tax consequences of lifetime gifts based on the tax laws in effect at death.  Cf., § 2001(b)(2) and (g).
  • It is more consistent with the past treatment of inflation adjustments, which allowed estates to receive the benefit of increases in the exclusion amount even though lifetime gifts had used part or all of the exclusion amount available at the time of the gifts.
  • It is more consistent with legislative history, because Congress has previously addressed the problems caused by the inclusion of adjusted taxable gifts in the tentative tax base by adjusting the manner in which the gift tax payable was calculated, as seen in § 2001(g)(1).
  • It is more favorable to taxpayers and, in the event of any inconsistencies or uncertainties in the application of the tax laws, the presumption should be in favor of the taxpayer.  See, e.g., Gould v. Gould, 245 U.S. 151, 152 (1917). 

The “Most Administrable Solution”

In the “Explanation of Provisions” included with the proposed regulations (83 F.R. at 59346), the Treasury Department and the IRS stated that the proposed regulations represent “the most administrable solution,” but do not say to what they are comparing the proposed regulations.

Any additional administrative burden created by the alternative solution I have described above should be minimal.  The instructions to Form 706 already required the preparation of a worksheet in which the hypothetical gift tax payable on lifetime gifts is recalculated to take into account both changes in tax rates and changes in the basic exclusion credit caused by changes in tax rates.  All that would be required to implement the alternative proposed regulation would be for the IRS to calculate and published the inflation-adjusted BEA for each year during the increased BEA period (which should be a one-time task, and does not even need to be done until the increased BEA period actually ends), and for the taxpayer to include those alternate BEAs in the worksheet calculations.

The approach taken by the proposed regulations might seem to be simpler, and more “administrable” than the recalculation of “gift tax payable” using a lesser BEA, as proposed above.  But the recalculation of gift tax payable is already required by the instructions to Form 706, due to changes in tax rates in 2010.  (See the Line 7 Worksheet on pages 8 and 9 of the Instructions for Form 706.)  The recalculation of gift tax payable using a lower BEA for deaths after 2025 could use the same worksheet, just using a different number for the BEA in the years from 2018 to 2025.  The recalculation of gift tax payable would therefore be consistent with current forms and would not require significant additional time or effort in preparing estate tax returns.

It appears that the proposed regulation might have been intended to be as broad as possible in order to be applicable to all future changes that Congress might enact for the BEA, and so would not be limited to the decrease in the BEA now scheduled to occur in 2026.  However, the proposed alternative could be as broadly applicable and, even if it were not, depriving taxpayers of the benefit of future inflation adjustments merely to try to anticipate the effects of legislation Congress has not yet enacted would not be an appropriate regulatory goal.

Gift Tax Regulations Needed

The supplementary information that accompanied the proposed regulations explained that federal gift tax calculations are different from federal estate tax calculations, and concluded that the changes in the BEA do not cause any gift tax problems.  However, a different conclusion is possible if the inflation adjustments to the BEA are considered.

The third situation the IRS considered is whether gift tax after 2025 might be increased by gifts made before 2026 that were sheltered from tax by the increased BEA.  The IRS concluded that no additional gift tax would result, because in a gift tax calculation, the gift tax in the current year is calculated by determining the tax on the total of the gifts in the current year and the gifts in all prior years, and then subtracting the tax on the gifts in the prior years.  Therefore, “the full amount of the gift tax liability on the increased BEA period gifts is removed from the computation, regardless of whether that liability was sheltered from gift tax by the BEA or was satisfied by a gift tax payment.”  Which is true, but doesn’t address the problem of how the gift tax credit for the BEA is calculated.

Normally, the credit against the gift tax is calculated by taking the tax on the applicable exclusion amount (AEA) for the current year, which is the sum of the BEA and any deceased spousal unused exclusion (DSUE), and subtracting the total credit allowable for prior years.  That result can’t be negative (or, as the IRS put it, “the tax on the current gift cannot exceed the tentative tax on that gift”), so there is no increase in the gift tax payable even if the credit allowed for prior years exceeds the AEA (or BEA) for the current year.  However, that conclusion fails to address the problem of increases in the BEA due to inflation.

Returning to the estate tax example, assume that A has made $12 million in gifts in 2018, survives to 2027, and then makes a taxable gift of $1 million.  The tentative gift tax will be the tax on $13 million (current year and prior years gifts) less the tax on $12 million (prior years’ gifts), which will be $400,000 (or 40% of $1 million).  The credit allowed in 2018 was the tax on $11,180,000, or $4,417,800, and credit in 2027 is assumed to be the tax on $6,580,000 ($5 million with inflation at 1.8%), or $2,560,000.  The difference between the two, $2,560,000 less $4,417,800, would be a negative number, so there is no credit, and the tax on the $1 million gift will be $400,000.

As in the case of the estate tax calculation, the increases in the BEA from 2018 to 2025, and from 2025 to 2027, have been completely ignored, even though donors are normally entitled to make additional tax-free gifts when the exclusion is increased for inflation.

Unlike the estate tax situation, this is not a problem with § 2001, but with § 2505(a)(2) and the determination of “the amounts allowable as a credit” for the gifts in prior years.   The gift tax problem caused by lowering the BEA could be resolved with an adjustment similar to the adjustment described above for estate tax calculations, so that the gift tax payable on lifetime gifts is increased to reflect the later decrease in the BEA.  For gift tax purposes, the adjustment is in the credit allowed instead of the gift tax payable, but the principle is the same.

And, as in the case of the gift tax payable for estate tax purposes, there is already a worksheet for recalculating the credits allowable for prior years.  See “Worksheet for Schedule B, Column C (Credit Allowable for Prior Periods),” from the Instructions for Form 709.  All that would be needed is to provide a different number for BEA for the year of the gift in the prior year.

There is no express authorization for this kind of gift tax regulation like there is in § 2001(g)(2) for estate tax calculations.  So there is no clear indication that Congress saw any problem, and no clear authority to vary the literal application of the § 2505.  However, if there is authority to issue new regulations for § 2010 based on the authority of both section 2010(c)(6) and section 2001(g), then there should be authority to issue a gift tax regulation for § 2505(a)(2).

Public Hearing

I believe that these written comments adequately express my views.  I therefore do not propose any topics for the public hearing that has been scheduled, and do not intend to attend the hearing.

Thank you for your consideration of these comments.

Sincerely yours,

Daniel B. Evans

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