83 Fed. Reg. 59343 – IRS Releases Proposed “Anti-Clawback” Regulations

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83 Fed. Reg. 59343

IRS Releases Proposed “Anti-Clawback” Regulations

Author: Paul Cathcart of Hemenway & Barnes LLP

Public Law 115-97, commonly known as the Tax Cuts and Jobs Act (“TCJA”), temporarily doubles the basic exclusion amount for gifts made and decedents dying between 2018 and 2025, inclusive.  See I.R.C. § 2010(c)(3)(C).  What TCJA did not address was whether gifts made during that period that are above the single-exclusion amount but below the double-exclusion amount and, therefore, gift-tax free might nevertheless generate estate tax if the individual dies after 2025,.  See I.R.C. § 2001(b).  Practitioners have called this the possibility of “clawback.”

In the TCJA, Congress appeared to direct that “clawback” be avoided by the promulgation of “such regulations as may be necessary or appropriate to carry out [I.R.C. § 2001]” with respect to any difference between the basic exclusion amount for the year of any gift and the basic exclusion amount for the year of death.  I.R.C. § 2001(g)(2).  Such an anti-“clawback” regulation has now been proposed. 83 Fed. Reg. 59343 (Nov. 23, 2018).  The proposed new subsection of Treas. Reg. § 20.2010-1 would effectively provide that if the sum of the basic exclusion amounts allowed against the decedent’s prior taxable gifts exceeds the statutory basic exclusion amount for the year of the decedent’s death, the decedent’s basic estate tax exclusion amount is the larger of the two.  The effect would be to increase the decedent’s basic estate tax exclusion amount to the extent necessary to shelter any gifts that did not generate tax when they were made but would otherwise have generated tax in the decedent’s estate.

The proposed new subsection involves only “basic exclusion amounts” and does not involve or affect the computation of any deceased spousal unused exclusion amount (“DSUE”).  Under the proposal, exclusion would not be allowed against lifetime gifts “off the top,” so the additional exclusion amount allowable between 2018 and 2025 would remain “use it or lose it.”

The preamble to the proposal also expresses the agency’s view that no regulation is needed to address so-called “reverse clawback” because, under the existing statutes, the additional exclusion allowable between 2018 and 2025 is not offset by prior gifts that generated tax.

Comments on the proposal are due by February 21, 2019.  Outlines of topics for discussion may also be submitted by the same due date, in which case a public hearing will be held on March 13, 2019.