Requirements to Ensure Collection of Section 2050A Estate Tax (TD 8686)

cept as otherwise provided in paragraph
(g)(2) of this section.
(2) Exceptions—(i) In general. For
purposes of determining the source of
the partner’s distributive share of partnership income or determining the
source of the partner’s income from the
sale of inventory property which the
partnership distributes to the partner in
kind, the partner’s production or sales
activity includes an activity conducted
by the partnership. In addition, the production activity of a partnership includes
the production activity of a taxpayer that
is a partner either directly or through
one or more partnerships, to the extent
that the partner’s production activity is
related to inventory that the partner
contributes to the partnership in a transaction described under section 721.
(ii) Attribution of production assets to
or from a partnership. A partner will be
treated as owning its proportionate share
of the partnership’s production assets
only to the extent that, under paragraph
(g)(2)(i) of this section, the partner’s
activity includes production activity conducted through a partnership. A partner’s
share of partnership assets will be determined by reference to the partner’s
distributive share of partnership income
for the year attributable to such production assets. Similarly, to the extent a
partnership’s activities include the production activities of a partner, the partnership will be treated as owning the
partner’s production assets related to the
inventory that is contributed in kind to
the partnership. See paragraph
(c)(1)(ii)(B) of this section for rules
apportioning the basis of assets to Section 863 Sales.
(iii) Basis. For purposes of this section, in those cases where the partner is
treated as owning its proportionate share
of the partnership’s production assets,
the partner’s basis in production assets
held through a partnership shall be determined by reference to the partnership’s adjusted basis in its assets (including a partner’s special basis
adjustment, if any, under section 743).
Similarly, a partnership’s basis in a
partner’s production assets is determined
with reference to the partner’s adjusted
basis in its assets.
(iv) Separate application of methods.
If, under paragraph (g)(2) of this section, a partner is treated as conducting
the activity of a partnership, and is
treated as owning its proportionate share
of a partnership’s production assets, a
partner must apply the method it has
elected under paragraph (b) of this sec-

tion separately to Section 863 Sales
described in this paragraph (g) and all
other Section 863 Sales.
(3) Examples. The following examples illustrate the rules of this paragraph (g):
Example 1. Distributive share of partnership
income. A, a U.S. corporation, forms a partnership
in the United States with B, a country X corporation. A and B each have a 50 percent interest in
the income, gains, losses, deductions and credits
of the partnership. The partnership is engaged in
the manufacture and sale of widgets. The widgets
are manufactured in the partnership’s plant located
in the United States and are sold by the partnership outside the United States. The partnership
owns the manufacturing facility and all other
production assets used to produce the widgets. A’s
distributive share of partnership income includes
50 percent of the sales income from these sales. In
applying the rules of section 863 to determine the
source of its distributive share of partnership
income from the export sales of widgets, A is
treated as carrying on the activity of the partnership related to production of these widgets and as
owning a proportionate share of the partnership’s
assets related to production of the widgets, based
upon its distributive share of partnership income.
Example 2. Distribution in kind. Assume the
same facts as in Example 1 except that the
partnership, instead of selling the widgets, distributes the widgets to A and B. A then further
processes the widgets and then sells them outside
the United States. In determining the source of the
income earned by A on the sales outside the
United States, A is treated as conducting the
activities of the partnership related to production
of the distributed widgets. Thus, the source of
gross income on the sale of the widgets is
determined under section 863 and these regulations. A applies the 50/50 method described in
paragraph (b)(1) of this section to determine the
source of income from the sales. In applying
paragraph (c)(1) of this section, A is treated as
owning its proportionate share of the partnership’s
production assets based upon its distributive share
of partnership income.

(h) Effective dates. The rules of this
section apply to taxable years beginning
December 30, 1996. However, taxpayers
may apply these regulations for taxable
years beginning after July 11, 1995, and
before December 30, 1996. For years
beginning before December 30, 1996,
see §§ 1.863–3A and 1.863–3AT.
Par. 7. Section 1.863–4 is amended by
revising the section heading and paragraph (a) to read as follows:

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§ 1.863–5 [Removed]
Par. 8. Section 1.863–5 is removed.
PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 9. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 10. In § 602.101, paragraph (c)
is amended by adding entries for
1.863–1 and 1.863–3A, and revising the
entry for 1.863–3 to read as follows:
§ 602.101 OMB Control numbers.
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(c) * * *
CFR part or section
where identified and
described
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1.863–1 . . . . . . . . . . . . . .
1.863–3 . . . . . . . . . . . . . .
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1.863–3A. . . . . . . . . . . . .
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Current OMB
control No.
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1545–1476
1545–1476
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1545–0126
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Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved November 25, 1996.
Donald C. Lubick,
Acting Assistant Secretary
of Tax Policy.
(Filed by the Office of the Federal Register on
November 27, 1996, 8:45 a.m., and published in
the issue of the Federal Register for November 29,
1996, 61 F.R. 60540)

Section 1491.—Imposition of Tax
If the status of a trust changes from domestic to
foreign, what are the consequences for purposes of
the section 1491 excise tax? See Notice 96–65,
page 28.

Section 2056A.—Qualified
Domestic Trust

§ 1.863–4 Certain transportation services.

26 CFR 20.2056A–2: Requirements for qualified
domestic trusts.

(a) General. A taxpayer carrying on
the business of transportation service
(other than an activity giving rise to
transportation income described in section 863(c) or to income subject to other
specific provisions of this title) between
points in the United States and points
outside the United States derives income
partly from sources within and partly
from sources without the United States.

T.D. 8686

14

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 20 and 602
Requirements to Ensure Collection
of Section 2056A Estate Tax
AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Final regulations.

Background

SUMMARY: This document contains
final regulations that provide guidance
relating to the additional requirements
necessary to ensure the collection of the
estate tax imposed under section
2056A(b) with respect to taxable events
involving qualified domestic trusts
(QDOTs) described in section 2056A(a).
DATES: These regulations are effective
November 29, 1996.
For dates of applicability, see
§ 20.2056A–2(d).

A notice of proposed rulemaking was
published in the Federal Register on
January 5, 1993 (58 FR 305), reflecting
amendments to the Internal Revenue
Code by the Technical and Miscellaneous Revenue Act of 1988 (Public Law
100–647), the Revenue Reconciliation
Act of 1989 (Public Law 101–239), and
the Revenue Reconciliation Act of 1990
(Public Law 101–508). The amendments
generally relate to sections 2056 and
2523, and affect the availability of the
estate and gift tax marital deduction
when the surviving spouse or the donee
spouse is not a United States citizen.
Part of the NPRM was published in the
Federal Register as final regulations, in
TD 8612, on August 22, 1995 (60 FR
43531 [1995–2 C.B. 192]). That part of
the NPRM that addressed the regulatory
requirements to ensure the collection of
the estate tax imposed by section
2056A(b)(1)(A) and (B) was published
in the Federal Register on August 22,
1995, in the form of temporary and
proposed regulations, (60 FR 43554 and
60 FR 43575, respectively) in order to
afford the public a further opportunity to
comment on these security arrangements.
On January 16, 1996, the IRS held a
hearing on the temporary and proposed
regulations. These final regulations reflect the comments received in response
to the temporary and proposed regulations.

FOR FURTHER INFORMATION CONTACT: Susan Hurwitz (202) 622–3090
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number
1545–1443. Responses to this collection
of information are required in order for
an estate to be eligible for the estate tax
marital deduction in cases where the
surviving spouse is not a United States
citizen.
An agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information displays a valid control number.
The estimated annual burden per respondent varies from 30 minutes to 3
hours, depending on individual circumstances, with an estimated average of
1.39 hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to
the Internal Revenue Service, Attn:
IRS Reports Clearance Officer T:FP,
Washington, DC 20224, and to the Office of Management and Budget, Attention: Desk Officer for the Department
of the Treasury, Office of Information
and Regulatory Affairs, Washington, DC
20503.
Books or records relating to this collection of information must be retained
as long as their contents may become
material in the administration of any
internal revenue law. Generally, tax returns and tax return information are
confidential, as required by 26 U.S.C.
6103.

Explanation of Provisions
The following is a summary of the
significant comments received and the
reasons for accepting or rejecting those
comments in the final regulations.
Under the temporary regulations, a
qualified domestic trust (QDOT) that
has assets in excess of $2 million, may
alternate among the three security arrangements provided in the regulations
(U.S. bank trustee, bond or letter of
credit), provided that at all times, at
least one of the three arrangements is in
effect. A QDOT with assets of $2
million or less need not satisfy these
requirements, if, in general, the trust
holdings of foreign situs real property
are limited to 35 percent of the fair
market value of the trust corpus.
Comments were received that trusts in
actual compliance with these regulatory
requirements, but which do not explicitly include the required language, will
not qualify as a QDOT. In addition,
comments suggested that the imposition
of numerous governing instrument re-

15

quirements will increase the difficulty of
drafting a QDOT and result in a trust
document that will have to include detailed provisions, many of which are not
likely to be applicable. A suggestion was
made that if the governing instrument
requirement is retained in the regulations, then the required security provisions should be permitted to be incorporated by reference in a trust document.
This suggestion was adopted. However,
in order to assist taxpayers who may
wish to specify the required provisions
in the governing instrument, the IRS has
published guidance in the Internal Revenue Bulletin (see § 602.101(d)(2) of
this chapter) providing sample language
that may be used in a QDOT instrument
to satisfy the additional security requirements contained in the final regulations.
In response to comments, the language of the regulations has been modified to clarify that the QDOT may
alternate among the three arrangements
provided in the regulations as long as, at
any given time, one of the three arrangements is required to be operative.
Comments suggested that the temporary regulations may be viewed as requiring that a QDOT that initially employs the bank trustee security
alternative must, irrespective of whether
the QDOT has switched to another
security option, continue to have at least
one U.S. Bank acting as a trustee. In
response to this comment, the final
regulations clarify that, if the QDOT
changes to a different security arrangement, a U.S. bank need not continue to
act as trustee.
Under the temporary regulations, in
determining whether the value of the
assets passing to a QDOT are in excess
of, or less than, $2 million, indebtedness
with respect to the assets is not taken
into account to reduce value. Similarly,
under the temporary regulations, the
amount of the bond or letter of credit
that is furnished to the IRS must be
equal to 65 percent of the fair market
value of the trust assets determined
‘‘without regard to any indebtedness
thereon.’’ Comments suggested that indebtedness should be taken into account
in determining whether the $2 million
dollar threshold has been exceeded and
the amount of the bond or letter of
credit required. This change has not
been made. The IRS and Treasury believe that the retention of the rule that
indebtedness on the property is not
taken into account to reduce value most
effectively ensures collection of the estate tax imposed under section

2056A(b). For the limited purpose under
this section (i.e., to determine whether
the $2 million threshold is exceeded and
the amount of the bond or letter of
credit to be furnished to the IRS) the
complexity that would be involved in
drafting rules to determine which debts
qualify to be taken into account and
which do not is not warranted.
Under the temporary regulations, with
regard to the bond and letter of credit
security options, if the fair market value
of the trust assets, is ‘‘finally determined’’ to be in excess of the value of
the trust assets as originally reported,
the trustee has a reasonable period of
time (not exceeding sixty days from the
date of the final determination) to adjust
the amount of the bond or letter of
credit. The temporary regulations also
use the term ‘‘finally determined’’ in
addressing substantial undervaluations of
property passing to a QDOT and the
grace period provided to meet the security requirements when a QDOT is
determined to contain assets in excess of
$2 million. Comments were received
suggesting that the regulations provide a
definition of ‘‘finally determined’’.
Accordingly, the final regulations provide that the value of the assets will be
finally determined on the earliest to
occur of—
1. The entry of a decision, judgment,
decree, or other order by any court of
competent jurisdiction that has become
final;
2. The execution of a closing agreement made under section 7121;
3. Any final disposition by the IRS of
a claim for refund;
4. The issuance of an estate tax closing letter (if no claim for refund is
filed); or
5. The expiration of the statute of
limitations for assessment with respect
to the decedent’s estate tax liability.
In response to comments, the regulation addressing the required duration of
the bond or letter of credit has been
clarified to provide that the security
arrangement must remain in effect until
the trust ceases to function as a QDOT.
Comments have been received regarding the amount of the bond or letter of
credit that must be furnished to the IRS.
One commentator stated that, since the
purpose of the bond or letter of credit
requirement is to provide a source of
funds for the payment of the section
2056A(b) estate tax, the amount of the
required bond or letter of credit should
be based on either the maximum federal
estate tax rate, or the amount of estate

tax deferred, rather than 65% of the
value of the QDOT, as provided in the
regulations. This suggestion has not
been adopted. Generally, the regulation
requires a bond of 65 percent of the
initial fair market value of the trust
assets to ensure that the potential estate
tax liability is adequately secured if the
trust property appreciates in value.
The temporary regulations providing
that notice of failure to renew a bond or
letter of credit must be ‘‘received by the
IRS at least 60 days prior to the end of
the term of the bond or letter of credit’’
has been changed to reference the date
the notice is ‘‘mailed to’’ the IRS.
Further, under the final regulations, the
notice must also be mailed to the U.S.
Trustee of the QDOT.
Under the regulations, in the case of a
QDOT of less than $2 million, if on the
last day of a taxable year of the QDOT,
the value of foreign real property owned
by the QDOT exceeds 35 percent of the
QDOT assets because of distributions of
principal during that year, or because of
fluctuations in the value of the foreign
currency in the jurisdiction where the
real property is located, a grace period
of one year is provided to allow the
trustee to comply with the 35 percent
limit. Comments suggested that changes
in the relative value of the trust assets
would also cause the trust to fail to
satisfy the 35 percent limit, and failure
to comply due to such changes that are
beyond the control of the trustee should
also be eligible for the grace period.
Accordingly, under the final regulations,
the trustee will also be accorded the
grace period to satisfy the 35 percent
limit if, as a result of changes in the
relative values of the trust assets, more
than 35 percent of the value of the trust
consists of foreign real estate.
Under the temporary regulations, for
purposes of determining whether the $2
million threshold has been exceeded,
and for purposes of determining the
amount of the bond or letter of credit,
the executor of the decedent’s estate
may exclude up to $600,000 in value
attributable to real property wherever
situated (and related furnishings) owned
directly by the QDOT that is used by
the surviving spouse as the spouse’s
principal residence. Comments were received that the regulations should be
expanded to allow the exclusion of all
residential real property that is actually
used by the surviving spouse. Thus, a
vacation home or second home would
qualify for the exclusion. It was also
suggested that all personally used resi-

16

dential real property, regardless of value,
should be eligible for the exclusion. The
final regulations do not change the monetary limit of $600,000 for the exclusion. The $600,000 limit for the exclusion facilitates the reduction of the costs
associated with providing security while
adequately ensuring the collection of the
section 2056A(b) tax. This is especially
the case in situations where the residential real property is situated outside the
United States so that a significant collection risk is presented. However, under
the final regulations the exclusion has
been redesignated as a ‘‘personal residence’’ exclusion. The exclusion is now
available for the principal residence of
the surviving spouse and one additional
residence, to the extent the combined
value excluded does not exceed
$600,000. The second residence will be
eligible for the exclusion only if the
residence is used by the surviving
spouse as a personal residence and not
subject to any rental arrangement with
any person.
Under the temporary regulations, the
residence exclusion election is made by
attaching a written statement to the
estate tax return on which the QDOT
election is made. Commentators suggested that the final regulations allow
the election to be made at any time
during the term of the QDOT, and not
necessarily at the time of filing of the
decedent’s estate tax return. For example, if the bank trustee alternative is
selected by the trustee of the QDOT, but
at some future date the trustee desires to
change to the bond or letter of credit
security arrangement, the trustee should
be given the opportunity to make a
delayed election of the exclusion. In
response to these comments, the final
regulations provide that the election may
be made at any time during the term of
the QDOT. In addition, the final regulation provides for the cancellation of a
prior election.
Under the temporary regulations, the
U.S. Trustee of a QDOT is required to
file an annual statement with the IRS
containing specified items of information (including a list of all assets held
by the QDOT together with the fair
market value of each asset determined
as of the last day of the taxable year) if
the residence exclusion applies during
the taxable year. Comments were received suggesting that the cost of compliance with this annual reporting requirement will limit the utility of the
residence exclusion. In response to these
comments, annual reporting is no longer

required solely because the personal
residence exclusion was elected. However, the regulations retain the annual
reporting requirement where the residence previously subject to the exclusion is sold, or where the residence
ceases to be used as a personal residence during the taxable or calendar
year.
Under the temporary regulations, if a
residence that is subject to the exclusion
is sold during the term of the QDOT,
the exclusion will continue to apply if,
within 12 months of the date of sale, the
amount of the adjusted sales price (as
defined in section 1034(d)(1)) is used to
purchase a new residence for the spouse.
In response to comments, this provision
has been amended to provide that if a
residence ceases to be used as the
personal residence of the spouse, or if
the residence is sold during the term of
the QDOT, the exclusion may be applied to another residence that is held in
either the same QDOT or in another
QDOT, if the other residence is used as
a personal residence of the spouse. The
amount of exclusion that may be applied
to the new personal residence under
these circumstances can be up to
$600,000 (less that amount previously
allocated to a residence that continues to
qualify for the exclusion) even if the
entire $600,000 exclusion was not previously used for the initial personal residence(s).
Also, under the temporary regulations,
on the sale of a residence, if less than
the entire adjusted sales price is reinvested in a new residence, then the
amount of the exclusion initially
claimed by the QDOT is reduced proportionately. For example, if a residence
is sold for an adjusted sales price of
$1,000,000 and a new residence is acquired for $800,000, then, the original
exclusion would be reduced by
$120,000 to $480,000: $200,000 (adjusted sales price not reinvested)/
$1,000,000 (adjusted sales price) x
$600,000. Comments were received suggesting that this rule be changed to
provide that the amount of the exclusion
as adjusted not be reduced below the
amount actually reinvested (up to
$600,000). This suggestion was adopted
in the final regulations, reflecting that
two residences can now qualify for the
$600,000 exclusion.
Special Analyses
It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not

apply to these regulations, and because
the notice of proposed rulemaking preceding the regulations was issued prior
to March 29, 1996, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply.
Drafting Information
The principal author of these regulations is Susan Hurwitz, Office of Assistant Chief Counsel (Passthroughs and
Special Industries). However, other personnel from the IRS and Treasury Department participated in their development.
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Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 20 and
602 are amended as follows:
PART 20—ESTATE TAX; ESTATES
OF DECEDENTS DYING AFTER AUGUST 16, 1954
Paragraph 1. The authority citation for
part 20 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In § 20.2056A–0, the table of
contents is amended by revising the
entry for § 20.2056A–2(d) to read as
follows:
§ 20.2056A–0 Table of contents.
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§ 20.2056A–2 Requirements for qualified domestic trust.
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(d) Additional requirements to ensure
collection of the section 2056A estate
tax.
(1) Security and other arrangements
for payment of estate tax imposed under
section 2056A(b)(1).
(2) Individual trustees.
(3) Annual reporting requirements.
(4) Request for alternate arrangement
or waiver.
(5) Adjustment of dollar threshold
and exclusion.
(6) Effective date and special rules.
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Par. 3. In § 20.2056A–2, paragraph
(d) is added to read as follows:
§ 20.2056A–2 Requirements for qualified domestic trust.
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(d) Additional requirements to ensure
collection of the section 2056A estate
tax—(1) Security and other arrange-

17

ments for payment of estate tax imposed
under section 2056A(b)(1)—(i) QDOTs
with assets in excess of $2 million. If
the fair market value of the assets
passing, treated, or deemed to have
passed to the QDOT (or in the form of
a QDOT), determined without reduction
for any indebtedness with respect to the
assets, as finally determined for federal
estate tax purposes, exceeds $2 million
as of the date of the decedent’s death or,
if applicable, the alternate valuation date
(adjusted as provided in paragraph
(d)(1)(iii) of this section), the trust instrument must meet the requirements of
either paragraph (d)(1)(i)(A), (B), or (C)
of this section at all times during the
term of the QDOT. The QDOT may
alternate between any of the arrangements provided in paragraphs (d)(1)(i)(A), (B), and (C) of this section provided that, at any given time, one of the
arrangements must be operative. See
paragraph (d)(1)(iii) of this section for
the definition of finally determined. The
QDOT may provide that the trustee has
the discretion to use any one of the
security arrangements or may provide
that the trustee is limited to using only
one or two of the arrangements specified in the trust instrument. A trust
instrument that specifically states that
the trust must be administered in compliance with paragraph (d)(1)(i)(A), (B),
or (C) of this section is treated as
meeting the requirements of paragraphs
(d)(1)(i)(A), (B), or (C) for purposes of
paragraphs (d)(1)(i) and, if applicable,
(d)(1)(ii) of this section.
(A) Bank Trustee. Except as otherwise provided in paragraph (d)(6)(ii) or
(iii) of this section, the trust instrument
must provide that whenever the Bank
Trustee security alternative is used for
the QDOT, at least one U.S. Trustee
must be a bank as defined in section
581. Alternatively, except as otherwise
provided in paragraph (d)(6)(ii) or (iii)
of this section, at least one trustee must
be a United States branch of a foreign
bank, provided that, in such cases, during the entire term of the QDOT a U.S.
Trustee must act as a trustee with the
foreign bank trustee.
(B) Bond. Except as otherwise provided in paragraph (d)(6)(ii) or (iii) of
this section, the trust instrument must
provide that whenever the bond security
arrangement alternative is used for the
QDOT, the U.S. Trustee must furnish a
bond in favor of the Internal Revenue
Service in an amount equal to 65 percent of the fair market value of the trust
assets (determined without regard to any

indebtedness with respect to the assets)
as of the date of the decedent’s death
(or alternate valuation date, if applicable), as finally determined for federal
estate tax purposes (and as further adjusted as provided in paragraph
(d)(1)(iv) of this section). If, after examination of the estate tax return, the
fair market value of the trust assets, as
originally reported on the estate tax
return, is adjusted (pursuant to a judicial
proceeding or otherwise) resulting in a
final determination of the value of the
assets as reported on the return, the U.S.
Trustee has a reasonable period of time
(not exceeding sixty days after the conclusion of the proceeding or other action
resulting in a final determination of the
value of the assets) to adjust the amount
of the bond accordingly. But see, paragraph (d)(1)(i)(D) of this section for a
special rule in the case of a substantial
undervaluation of QDOT assets. Unless
an alternate arrangement under paragraph (d)(1)(i)(A), (B), or (C) of this
section, or an arrangement prescribed
under paragraph (d)(4) of this section, is
provided, or the trust is otherwise no
longer subject to the requirements of
section 2056A pursuant to section
2056A(b)(12), the bond must remain in
effect until the trust ceases to function
as a QDOT and any tax liability finally
determined to be due under section
2056A(b) is paid, or is finally determined to be zero.
(1) Requirements for the bond. The
bond must be with a satisfactory surety,
as prescribed under section 7101 and
§ 301.7101–1 of this chapter (Regulations on Procedure and Administration),
and is subject to Internal Revenue Service review as may be prescribed by the
Commissioner. The bond may not be
cancelled. The bond must be for a term
of at least one year and must be automatically renewable at the end of that
term, on an annual basis thereafter,
unless notice of failure to renew is
mailed to the U.S. Trustee and the
Internal Revenue Service at least 60
days prior to the end of the term,
including periods of automatic extensions. Any notice of failure to renew
required to be sent to the Internal Revenue Service must be sent to the Estate
and Gift Tax Group in the District
Office of the Internal Revenue Service
that has examination jurisdiction over
the decedent’s estate (Internal Revenue
Service, District Director, [specify location] District Office, Estate and Gift Tax
Examination Group, [specify Street Address, City, State, Zip Code]) (or in the

case of noncitizen decedents and United
States citizens who die domiciled outside the United States, Estate Tax
Group, Assistant Commissioner (International), 950 L’Enfant Plaza, CP:IN:D:C:EX:HQ:1114, Washington, DC 20024).
The Internal Revenue Service will not
draw on the bond if, within 30 days of
receipt of the notice of failure to renew,
the U.S. Trustee notifies the Internal
Revenue Service (at the same address to
which notice of failure to renew is to be
sent) that an alternate arrangement under
paragraph (d)(1)(i)(A), (B), or (C) or
(d)(4) of this section, has been secured
and that the arrangement will take effect
immediately prior to or upon expiration
of the bond.
(2) Form of bond. The bond must be
in the following form (or in a form that
is the same as the following form in all
material respects), or in such alternative
form as the Commissioner may prescribe by guidance published in the
Internal Revenue Bulletin (see
§ 601.601(d)(2) of this chapter):
Bond in Favor of the Internal Revenue Service To Secure Payment of
Section 2056A Estate Tax Imposed Under Section 2056A(b) of the Internal
Revenue Code.
KNOW ALL PERSONS BY
THESE PRESENTS, That the under, the SURETY,
signed,
, the PRINCIPAL,
and
are irrevocably held and firmly bound to
pay the Internal Revenue Service upon
written demand that amount of any tax
up to $[amount determined under paragraph (d)(1)(i)(B) of this section], imposed under section 2056A(b)(1) of the
Internal Revenue Code (including penalties and interest on said tax) determined
by the Internal Revenue Service to be
payable with respect to the principal as
trustee for: [Identify trust and governing
instrument, name and address of
trustee], a qualified domestic trust as
defined in section 2056A(a) of the Internal Revenue Code, for the payment of
which the said Principal and said Surety,
bind themselves, their heirs, executors,
administrators, successors and assigns,
jointly and severally, firmly by these
presents.
WHEREAS, The Internal Revenue
Service may demand payment under this
bond at any time if the Internal Revenue
Service in its sole discretion determines
that a taxable event with respect to the
trust has occurred; the trust no longer
qualifies as a qualified domestic trust as
described in section 2056A(a) of the

18

Internal Revenue Code and the regulations promulgated thereunder, or a distribution subject to the tax imposed
under section 2056A(b)(1) has been
made. Demand by the Internal Revenue
Service for payment may be made
whether or not the tax and tax return
(Form 706–QDT) with respect to the
taxable event is due at the time of such
demand, or an assessment has been
made by the Internal Revenue Service
with respect to the tax.
NOW THEREFORE, The condition
of this obligation is such that it must not
be cancelled and, if payment of all tax
liability finally determined to be imposed under section 2056A(b) is made,
then this obligation is null and void;
otherwise, this obligation is to remain in
full force and effect for one year from
its effective date and is to be automatically renewable on an annual basis
unless, at least 60 days prior to the
expiration date, including periods of
automatic renewals, the surety mails to
the U.S. Trustee and the Internal Revenue Service by Registered or Certified
Mail, return receipt requested, notice of
the failure to renew. Receipt of this
notice of failure to renew by the Internal
Revenue Service may be considered a
taxable event. The Internal Revenue Service will not draw upon the bond if,
within 30 days of receipt of the notice
of failure to renew, the trustee notifies
the Internal Revenue Service that an
alternate security arrangement has been
secured and that the arrangement will
take effect immediately prior to or upon
expiration of the bond. The surety remains liable for all taxable events occurring prior to the date of expiration.
All notices required to be sent to the
Internal Revenue Service under this
instrument should be sent to District
Director, [specify location] District Office, Estate and Gift Tax Examination
Group, Street Address, City, State, Zip
Code. (In the case of nonresident noncitizen decedents and United States citizens who die domiciled outside the
United States, all notices should be sent
to Estate Tax Group, Assistant Commissioner (International), 950 L’Enfant
Plaza, CP:IN:D:C:EX:HQ:1114, Washington, DC 20024).
This bond shall be effective as of
. Principal
Date
Surety
Date
(3) Additional governing instrument
requirements. The trust instrument must
provide that in the event the Internal
Revenue Service draws on the bond, in

accordance with its terms, neither the
U.S. Trustee nor any other person will
seek a return of any part of the remittance until after April 15th of the calendar year following the year in which the
bond is drawn upon. After that date, any
such remittance will be treated as a
deposit and returned (without interest)
upon request of the U.S. Trustee, unless
it is determined that assessment or collection of the tax imposed by section
2056A(b)(1) is in jeopardy, within the
meaning of section 6861. If an assessment under section 6861 is made, the
remittance will first be credited to any
tax liability reported on the Form 706–
QDT, then to any unpaid balance of a
section 2056A(b)(1)(A) tax liability
(plus interest and penalties) for any
prior taxable years, and any balance will
then be returned to the U.S. Trustee.
(4) Procedure. The bond is to be
filed with the decedent’s federal estate
tax return, Form 706 or 706NA (unless
an extension for filing the bond is
granted under § 301.9100 of this chapter). The U.S. Trustee must provide a
written statement with the bond that
provides a list of the assets that will be
used to fund the QDOT and the respective values of the assets. The written
statement must also indicate whether
any exclusions under paragraph
(d)(1)(iv) of this section are claimed.
(C) Letter of credit. Except as otherwise provided in paragraph (d)(6)(ii) or
(iii) of this section, the trust instrument
must provide that whenever the letter of
credit security arrangement is used for
the QDOT, the U.S. Trustee must furnish an irrevocable letter of credit issued
by a bank as defined in section 581, a
United States branch of a foreign bank,
or a foreign bank with a confirmation
by a bank as defined in section 581. The
letter of credit must be for an amount
equal to 65 percent of the fair market
value of the trust assets (determined
without regard to any indebtedness with
respect to the assets) as of the date of
the decedent’s death (or alternate valuation date, if applicable), as finally determined for federal estate tax purposes
(and as further adjusted as provided in
paragraph (d)(1)(iv) of this section). If,
after examination of the estate tax return, the fair market value of the trust
assets, as originally reported on the
estate tax return, is adjusted (pursuant to
a judicial proceeding or otherwise) resulting in a final determination of the
value of the assets as reported on the
return, the U.S. Trustee has a reasonable
period of time (not exceeding 60 days

after the conclusion of the proceeding or
other action resulting in a final determination of the value of the assets) to
adjust the amount of the letter of credit
accordingly. But see, paragraph
(d)(1)(i)(D) of this section for a special
rule in the case of a substantial undervaluation of QDOT assets. Unless an
alternate arrangement under paragraph
(d)(1)(i)(A), (B), or (C) of this section,
or an arrangement prescribed under
paragraph (d)(4) of this section, is provided, or the trust is otherwise no longer
subject to the requirements of section
2056A
pursuant
to
section
2056A(b)(12), the letter of credit must
remain in effect until the trust ceases to
function as a QDOT and any tax liability finally determined to be due under
section 2056A(b) is paid or is finally
determined to be zero.
(1) Requirements for the letter of
credit. The letter of credit must be
irrevocable and provide for sight payment. The letter of credit must have a
term of at least one year and must be
automatically renewable at the end of
the term, at least on an annual basis,
unless notice of failure to renew is
mailed to the U.S. Trustee and the
Internal Revenue Service at least sixty
days prior to the end of the term,
including periods of automatic renewals.
If the letter of credit is issued by the
U.S. branch of a foreign bank and the
U.S. branch is closing, the branch (or
foreign bank) must notify the U.S.
Trustee and the Internal Revenue Service
of the closure and the notice of closure
must be mailed at least 60 days prior to
the date of closure. Any notice of failure
to renew or closure of a U.S. branch of
a foreign bank required to be sent to the
Internal Revenue Service must be sent to
the Estate and Gift Tax Group in the
District Office of the Internal Revenue
Service that has examination jurisdiction
over the decedent’s estate (Internal Revenue Service, District Director, [specify
location] District Office, Estate and Gift
Tax Examination Group, [Street Address,
City State, Zip Code]) (or in the case of
noncitizen decedents and United States
citizens who die domiciled outside the
United States, Estate Tax, Assistant
Commissioner (International), 950
L’Enfant Plaza, CP:IN:D:C:EX:HQ:1114,
Washington, DC 20024). The Internal
Revenue Service will not draw on the
letter of credit if, within 30 days of
receipt of the notice of failure to renew
or closure of the U.S. branch of a
foreign bank, the U.S. Trustee notifies
the Internal Revenue Service (at the

19

same address to which notice is to be
sent) that an alternate arrangement under
paragraph (d)(1)(i)(A), (B), or (C), or
(d)(4) of this section, has been secured
and that the arrangement will take effect
immediately prior to or upon expiration
of the letter of credit or closure of the
U.S. branch of the foreign bank.
(2) Form of letter of credit. The letter
of credit must be made in the following
form (or in a form that is the same as
the following form in all material respects), or an alternative form that the
Commissioner prescribes by guidance
published in the Internal Revenue Bulletin (see § 601.601(d)(2) of this chapter):
[Issue Date]
To: Internal Revenue Service
Attention: District Director, [specify
location] District Office
Estate and Gift Tax Examination
Group
[Street Address, City, State,
ZIP Code]
[Or in the case of nonresident noncitizen
decedents and United States citizens
who die domiciled outside the United
States,
To: Estate Tax Group,
Assistant Commissioner
(International)
950 L’Enfant Plaza
CP:IN:D:C:EX:HQ:1114
Washington, DC 20024].
Dear Sirs:
We hereby establish our irrevocable
in your favor
Letter of Credit No.
for drawings up to U.S. $ [Applicant
should provide bank with amount which
Applicant determined under paragraph
(d)(1)(i)(C)] effective immediately. This
Letter of Credit is issued, presentable
and payable at our office at
and expires at 3:00 p.m.
[EDT, EST, CDT, CST, MDT, MST,
at said office.
PDT, PST] on
For information and reference only,
we are informed that this Letter of
Credit relates to [Applicant should provide bank with the identity of qualified
domestic trust and governing instrument], and the name, address, and identifying number of the trustee is [Applicant should provide bank with the
trustee name, address and the QDOT’s
TIN number, if any].
Drawings on this Letter of Credit are
available upon presentation of the following documents:
1. Your draft drawn at sight on us
bearing our Letter of Credit No.
; and

2. Your signed statement as follows:
The amount of the accompanying
draft is payable under [identify bank]
irrevocable Letter of Credit No.
pursuant to section
2056A of the Internal Revenue Code
and the regulations promulgated
thereunder, because the Internal Revenue Service in its sole discretion has
determined that a ‘‘taxable event’’
with respect to the trust has occurred;
e.g., the trust no longer qualifies as a
qualified domestic trust as described
in section 2056A of the Internal Revenue Code and regulations promulgated thereunder, or a distribution
subject to the tax imposed under
section 2056A(b)(1) of the Internal
Revenue Code has been made.
Except as expressly stated herein, this
undertaking is not subject to any agreement, requirement or qualification. The
obligation of [Name of Issuing Bank]
under this Letter of Credit is the individual obligation of [Name of Issuing
Bank] and is in no way contingent upon
reimbursement with respect thereto.
It is a condition of this Letter of
Credit that it is deemed to be automatically extended without amendment for a
period of one year from the expiration
date hereof, or any future expiration
date, unless at least 60 days prior to any
expiration date, we mail to you and to
the U.S. Trustee notice by Registered
Mail or Certified Mail, return receipt
requested, or by courier to your and the
trustee’s address indicated above, that
we elect not to consider this Letter of
Credit renewed for any such additional
period. Upon receipt of this notice, you
may draw hereunder on or before the
then current expiration date, by presentation of your draft and statement as
stipulated above.
[In the case of a letter of credit issued
by a U.S. branch of a foreign bank the
following language must be added]. It is
a further condition of this Letter of
Credit that if the U.S. branch of [name
of foreign bank] is to be closed, that at
least sixty days prior to closing, we mail
to you and the U.S. Trustee notice by
Registered Mail or Certified Mail, return
receipt requested, or by courier to your
and the U.S. Trustee’s address indicated
above, that this branch will be closing.
This notice will specify the actual date of
closing. Upon receipt of the notice, you
may draw hereunder on or before the
date of closure, by presentation of your
draft and statement as stipulated above.
Except where otherwise stated herein,
this Letter of Credit is subject to the

Uniform Customs and Practice for
Documentary Credits, 1993 Revision,
ICC Publication No. 500. If we notify
you of our election not to consider this
Letter of Credit renewed and the expiration date occurs during an interruption
of business described in Article 17 of
said Publication 500, unless you had
consented to cancellation prior to the
expiration date, the bank hereby specifically agrees to effect payment if this
Letter of Credit is drawn against within
30 days after the resumption of business.
Except as stated herein, this Letter of
Credit cannot be modified or revoked
without your consent.
Authorized Signature
Date
(3) Form of confirmation. If the requirements of this paragraph (d)(1)(i)(C) are
satisfied by the issuance of a letter of
credit by a foreign bank with confirmation by a bank as defined in section 581,
the confirmation must be made in the
following form (or in a form that is the
same as the following form in all material respects), or an alternative form as
the Commissioner prescribes by guidance published in the Internal Revenue
Bulletin (see § 602.101(d)(2) of this
chapter):
[Issue Date]
To: Internal Revenue Service
Attention: District Director,
[specify location]
District Office
Estate and Gift Tax
Examination Group
[State Address, City,
State, ZIP Code]
[or in the case of nonresident noncitizen
decedents and United States citizens
who die domiciled outside the United
States,
To: Estate Tax Group,
Assistant Commissioner
(International)
950 L’Enfant Plaza
CP:IN:D:C:EX:HQ:1114
Washington, DC 20024].
Dear Sirs:
We hereby confirm the enclosed irre,
vocable Letter of Credit No.
and amendments thereto, if any, in your
[Issuing Bank]
favor by
for drawings up to U.S. $
[same amount as in initial Letter of
Credit] effective immediately. This confirmation is issued, presentable and payand
able at our office at

20

expires at 3:00 p.m. [EDT, EST,
CDT, CST, MDT, MST, PDT, PST] on
at said office.
For information and reference only,
we are informed that this Confirmation
relates to [Applicant should provide
bank with the identity of qualified domestic trust and governing instrument],
and the name, address, and identifying
number of the trustee is [Applicant
should provide bank with the trustee
name, address and the QDOT’s TIN
number, if any].
We hereby undertake to honor your
sight draft(s) drawn as specified in the
Letter of Credit.
Except as expressly stated herein, this
undertaking is not subject to any agreement, condition or qualification. The
obligation of [Name of Confirming
Bank] under this Confirmation is the
individual obligation of [Name of Confirming Bank] and is in no way contingent upon reimbursement with respect
thereto.
It is a condition of this Confirmation
that it is deemed to be automatically
extended without amendment for a period of one year from the expiry date
hereof, or any future expiration date,
unless at least sixty days prior to the
expiration date, we send to you and to
the U.S. Trustee notice by Registered
Mail or Certified Mail, return receipt
requested, or by courier to your and the
trustee’s addresses, respectively, indicated above, that we elect not to consider this Confirmation renewed for any
additional period. Upon receipt of this
notice by you, you may draw hereunder
on or before the then current expiration
date, by presentation of your draft and
statement as stipulated above.
Except where otherwise stated herein,
this Confirmation is subject to the Uniform Customs and Practice for Documentary Credits, 1993 Revision, ICC
Publication No. 500. If we notify you of
our election not to consider this Confirmation renewed and the expiration date
occurs during an interruption of business
described in Article 17 of said Publication 500, unless you had consented to
cancellation prior to the expiration date,
the bank hereby specifically agrees to
effect payment if this Confirmation is
drawn against within 30 days after the
resumption of business.
Except as stated herein, this Confirmation cannot be modified or revoked
without your consent.
Authorized Signature
Date

(4) Additional governing instrument
requirements. The trust instrument must
provide that if the Internal Revenue
Service draws on the letter of credit (or
confirmation) in accordance with its
terms, neither the U.S. Trustee nor any
other person will seek a return of any
part of the remittance until April 15th of
the calendar year following the year in
which the letter of credit (or confirmation) is drawn upon. After that date, any
such remittance will be treated as a
deposit and returned (without interest)
upon request of the U.S. Trustee after
the date specified above, unless it is
determined that assessment or collection
of the tax imposed by section
2056A(b)(1) is in jeopardy, within the
meaning of section 6861. If an assessment under section 6861 is made, the
remittance will first be credited to any
tax liability reported on the Form 706–
QDT, then to any unpaid balance of a
section 2056A(b)(1)(A) tax liability
(plus interest and penalties) for any
prior taxable years, and any balance will
then be returned to the U.S. Trustee.
(5) Procedure. The letter of credit
(and confirmation, if applicable) is to be
filed with the decedent’s federal estate
tax return, Form 706 or 706NA (unless
an extension for filing the letter of
credit is granted under § 301.9100 of
this chapter). The U.S. Trustee must
provide a written statement with the
letter of credit that provides a list of the
assets that will be used to fund the
QDOT and the respective values of the
assets. The written statement must also
indicate whether any exclusions under
paragraph (d)(1)(iv) of this section are
claimed.
(D) Disallowance of marital deduction for substantial undervaluation of
QDOT property in certain situations. (1)
If either—
(i) The bond or letter of credit security arrangement under paragraph
(d)(1)(i)(B) or (C) of this section is
chosen by the U.S. Trustee; or
(ii) The QDOT property as originally
reported on the decedent’s estate tax
return is valued at $2 million or less
but, as finally determined for federal
estate tax purposes, the QDOT property
is determined to be in excess of $2
million, then the marital deduction will
be disallowed in its entirety for failure
to comply with the requirements of
section 2056A if the value of the QDOT
property reported on the estate tax return is 50 percent or less of the amount

finally determined to be the correct
value of the property for federal estate
tax purposes.
(2) The preceding sentence does not
apply if—
(i) There was reasonable cause for
the undervaluation; and
(ii) The fiduciary of the estate acted
in good faith with respect to the undervaluation. For this purpose, § 1.6664–
4(b) of this chapter applies, to the extent
applicable, with respect to the facts and
circumstances to be taken into account
in making this determination.
(ii) QDOTs with assets of $2 million
or less. If the fair market value of the
assets passing, treated, or deemed to
have passed to the QDOT (or in the
form of a QDOT), determined without
reduction for any indebtedness with respect to the assets, as finally determined
for federal estate tax purposes, is $2
million or less as of the date of the
decedent’s death or, if applicable, the
alternate valuation date (adjusted as provided in paragraph (d)(1)(iv) of this
section), the trust instrument must provide that either no more than 35 percent
of the fair market value of the trust
assets, determined annually on the last
day of the taxable year of the trust (or
on the last day of the calendar year if
the QDOT does not have a taxable
year), will consist of real property located outside of the United States, or the
trust will meet the requirements prescribed by paragraph (d)(1)(i)(A), (B),
or (C) of this section. See paragraph
(d)(1)(ii)(D) of this section for special
rules in the case of principal distributions from a QDOT, fluctuations in the
value of foreign real property held by a
QDOT due to changes in value of
foreign currency, and fluctuations in the
fair market value of assets held by the
QDOT. See paragraph (d)(1)(iv) of this
section for a special rule for personal
residences. If the fair market value, as
originally reported on the decedent’s
estate tax return, of the assets passing or
deemed to have passed to the QDOT
(determined without reduction for any
indebtedness with respect to the assets)
is $2 million or less, but the fair market
value of the assets as finally determined
for federal estate tax purposes is more
than $2 million, the U.S. Trustee has a
reasonable period of time (not exceeding
sixty days after the conclusion of the
proceeding or other action resulting in a
final determination of the value of the
assets) to meet the requirements prescribed by paragraph (d)(1)(i)(A), (B),
or (C) of this section. However, see

21

paragraph (d)(1)(i)(D) of this section in
the case of a substantial undervaluation
of QDOT assets. See § 20.2056A–
2(d)(1)(iii) for the definition of finally
determined.
(A) Multiple QDOTs. For purposes of
this paragraph (d)(1)(ii), if more than
one QDOT is established for the benefit
of the surviving spouse, the fair market
value of all the QDOTs are aggregated
in determining whether the $2 million
threshold under this paragraph (d)(1)(ii)
is exceeded.
(B) Look-through rule. For purposes
of determining whether no more than 35
percent of the fair market value of the
QDOT assets consists of foreign real
property, if the QDOT owns more than
20% of the voting stock or value in a
corporation with 15 or fewer shareholders, or more than 20% of the capital
interest of a partnership with 15 or
fewer partners, then all assets owned by
the corporation or partnership are
deemed to be owned directly by the
QDOT to the extent of the QDOT’s pro
rata share of the assets of that corporation or partnership. For a partnership,
the QDOT partner’s pro rata share is
based on the greater of its interest in the
capital or profits of the partnership. For
purposes of this paragraph, all stock in
the corporation, or interests in the partnership, as the case may be, owned by
or held for the benefit of the surviving
spouse, or any members of the surviving
spouse’s family (within the meaning of
section 267(c)(4)), are treated as owned
by the QDOT solely for purposes of
determining the number of partners or
shareholders in the entity and the
QDOT’s percentage voting interest or
value in the corporation or capital interest in the partnership, but not for the
purpose of determining the QDOT’s pro
rata share of the assets of the entity.
(C) Interests in other entities. Interests owned by the QDOT in other
entities (such as an interest in a trust)
are accorded treatment consistent with
that described in paragraph (d)(1)(ii)(B)
of this section.
(D) Special rule for foreign real
property. For purposes of this paragraph
(d)(1)(ii), if, on the last day of any
taxable year during the term of the
QDOT (or the last day of the calendar
year if the QDOT does not have a
taxable year), the value of foreign real
property owned by the QDOT exceeds
35 percent of the fair market value of
the trust assets due to: distributions of
QDOT principal during that year; fluctuations in the value of the foreign

currency in the jurisdiction where the
real estate is located; or fluctuations in
the fair market value of any assets held
in the QDOT, then the QDOT will not
be treated as failing to meet the requirements of this paragraph (d)(1). Accordingly, the QDOT will not cease to be a
QDOT within the meaning of
§ 20.2056A–5(b)(3) if, by the end of
the taxable year (or the last day of the
calendar year if the QDOT does not
have a taxable year) of the QDOT
immediately following the year in which
the 35 percent limit was exceeded, the
value of the foreign real property held
by the QDOT does not exceed 35
percent of the fair market value of the
trust assets or, alternatively, the QDOT
meets the requirements of either paragraph (d)(1)(i)(A), (B), or (C) of this
section on or before the close of that
succeeding year.
(iii) Definition of finally determined.
For purposes of § 20.2056A–2(d)(1)(i)
and (ii), the fair market value of assets
will be treated as finally determined on
the earliest to occur of—
(A) The entry of a decision, judgment, decree, or other order by any
court of competent jurisdiction that has
become final;
(B) The execution of a closing agreement made under section 7121;
(C) Any final disposition by the Internal Revenue Service of a claim for
refund;
(D) The issuance of an estate tax
closing letter (Form L–154 or equivalent) if no claim for refund is filed; or
(E) The expiration of the period of
assessment.
(iv) Special rules for personal residence and related personal effects—(A)
Two million dollar threshold. For purposes of determining whether the $2
million threshold under paragraphs
(d)(1)(i) and (ii) of this section has been
exceeded, the executor of the estate may
elect to exclude up to $600,000 in value
attributable to real property (and related
furnishings) owned directly by the
QDOT that is used by, or held for the
use of the surviving spouse as a personal residence and that passes, or is
treated as passing, to the QDOT under
section 2056(d). The election may be
made regardless of whether the real
property is situated within or without
the United States. The election is made
by attaching to the estate tax return on
which the QDOT election is made a
written statement claiming the exclusion.
The statement must clearly identify the

property or properties (i.e. address and
location) for which the election is being
made.
(B) Security requirement. For purposes of determining the amount of the
bond or letter of credit required when
paragraph (d)(1)(i)(B) or (C) of this
section applies, the executor of the estate may elect to exclude, during the
term of the QDOT, up to $600,000 in
value attributable to real property (and
related furnishings) owned directly by
the QDOT that is used by, or held for
the use of the surviving spouse as a
personal residence and that passes, or is
treated as passing, to the QDOT under
section 2056(d). The election may be
made regardless of whether the real
property is situated within or without
the United States. The election is made
by attaching to the estate tax return on
which the QDOT election is made a
written statement claiming the exclusion.
If an election is not made on the
decedent’s estate tax return, the election
may be made, prospectively, at any
time, during the term of the QDOT, by
attaching to the Form 706–QDT a written statement claiming the exclusion. A
statement may also be attached to the
Form 706–QDT that cancels a prior
election of the personal residence exclusion that was made under this paragraph, either on the decedent’s estate tax
return or on a Form 706–QDT.
(C) Foreign real property limitation.
The special rules of this paragraph
(d)(1)(iv) do not apply for purposes of
determining whether more than 35 percent of the QDOT assets consist of
foreign real property under paragraph
(d)(1)(ii) of this section.
(D) Personal residence. For purposes
of this paragraph (d)(1)(iv), a personal
residence is either the principal residence of the surviving spouse within the
meaning of section 1034 or one other
residence of the surviving spouse. In
order to be used by or held for the use
of the spouse as a personal residence,
the residence must be available at all
times for use by the surviving spouse.
The residence may not be rented to
another party, even when not occupied
by the spouse. A personal residence may
include appurtenant structures used by
the surviving spouse for residential purposes and adjacent land not in excess of
that which is reasonably appropriate for
residential purposes (taking into account
the residence’s size and location).
(E) Related furnishings. The term related furnishings means furniture and
commonly included items such as appli-

22

ances, fixtures, decorative items and
china, that are not beyond the value
associated with normal household and
decorative use. Rare artwork, valuable
antiques, and automobiles of any kind or
class are not within the meaning of this
term.
(F) Required statement. If one or
both of the exclusions provided in paragraph (d)(1)(iv)(A) or (B) of this section
are elected by the executor of the estate
and the personal residence is later sold
or ceases to be used, or held for use as
a personal residence, the U.S. Trustee
must file the statement that is required
under paragraph (d)(3) of this section at
the time and in the manner provided in
paragraphs (d)(3)(ii) and (iii) of this
section.
(G) Cessation of use. Except as provided in this paragraph (d)(1)(iv)(G), if
the residence ceases to be used by, or
held for the use of, the spouse as a
personal residence of the spouse, or if
the residence is sold during the term of
the QDOT, the exclusions provided in
paragraphs (d)(1)(iv)(A) and (B) of this
section cease to apply. However, if the
residence is sold, the exclusion continues to apply if, within 12 months of the
date of sale, the amount of the adjusted
sales price (as defined in section
1034(b)(1)) is reinvested to purchase a
new personal residence for the spouse.
If less than the amount of the adjusted
sales price is reinvested, the amount of
the exclusion equals the amount reinvested in the new residence plus any
amount previously allocated to a residence that continues to qualify for the
exclusion, up to a total of $600,000. If
the QDOT ceases to qualify for all or
any portion of the initially claimed
exclusions, paragraph (d)(1)(i) of this
section, if applicable (determined as if
the portion of the exclusions disallowed
had not been initially claimed by the
QDOT), must be complied with no later
than 120 days after the effective date of
the cessation. In addition, if a residence
ceases to be used by, or held for the use
of the spouse as a personal residence of
the spouse or if the personal residence is
sold during the term of the QDOT, the
personal residence exclusion may be
allocated to another residence that is
held in either the same QDOT or in
another QDOT that is established for the
surviving spouse, if the other residence
qualifies as being used by, or held for
the use of the spouse as a personal
residence. The trustee may allocate up
to $600,000 to the new personal residence (less the amount previously allo-

cated to a residence that continues to
qualify for the exclusion) even if the
entire $600,000 exclusion was not previously utilized with respect to the original personal residence(s).
(v) Anti-abuse rule. Regardless of
whether the QDOT designates a bank as
the U.S. Trustee under paragraph
(d)(1)(i)(A) of this section (or otherwise
complies with paragraph (d)(1)(i)(A) of
this section by naming a foreign bank
with a United States branch as a trustee
to serve with the U.S. Trustee), complies
with paragraph (d)(1)(i)(B) or (C) of
this section, or is subject to and complies with the foreign real property
requirements of paragraph (d)(1)(ii) of
this section, the trust immediately ceases
to qualify as a QDOT if the trust
utilizes any device or arrangement that
has, as a principal purpose, the avoidance of liability for the estate tax imposed under section 2056A(b)(1), or the
prevention of the collection of the tax.
For example, the trust may become
subject to this paragraph (d)(1)(v) if the
U.S. Trustee that is selected is a domestic corporation established with insubstantial capitalization by the surviving
spouse or members of the spouse’s
family.
(2) Individual trustees. If the U.S.
Trustee is an individual United States
citizen, the individual must have a tax
home (as defined in section 911(d)(3))
in the United States.
(3) Annual reporting requirements—
(i) In general. The U.S. Trustee must
file a written statement described in
paragraph (d)(3)(iii) of this section, if
the QDOT satisfies any one of the
following criteria for the applicable reporting years—
(A) The QDOT directly owns any
foreign real property on the last day of
its taxable year (or the last day of the
calendar year if it has no taxable year),
and the QDOT does not satisfy the
requirements of paragraph (d)(1)(i)(A),
(B), or (C) or (d)(4) of this section by
employing a bank as trustee or providing security; or
(B) The personal residence previously
subject to the exclusion under paragraph
(d)(1)(iv) of this section is sold, or that
personal residence ceases to be used, or
held for use, as a personal residence,
during the taxable year (or during the
calendar year if the QDOT does not
have a taxable year); or
(C) After the application of the lookthrough rule contained in paragraph
(d)(1)(ii)(B) of this section, the QDOT
is treated as owning any foreign real

property on the last day of the taxable
year (or the last day of the calendar year
if the QDOT has no taxable year), and
the QDOT does not satisfy the requirements of paragraph (d)(1)(A), (B), (C)
or (d)(4) of this section by employing a
bank as trustee or providing security.
(ii) Time and manner of filing. The
written statement, containing the information described in paragraph (d)(3)(iii)
of this section, is to be filed for the
taxable year of the QDOT (calendar
year if the QDOT does not have a
taxable year) for which any of the
events or conditions requiring the filing
of a statement under paragraph (d)(3)(i)
of this section have occurred or have
been satisfied. The written statement is
to be submitted to the Internal Revenue
Service by filing a Form 706–QDT, with
the statement attached, no later than
April 15th of the calendar year following the calendar year in which or with
which the taxable year of the QDOT
ends (or by April 15th of the following
year if the QDOT has no taxable year),
unless an extension of time is obtained
under § 20.2056A–11(a). The Form
706–QDT, with attached statement, must
be filed regardless of whether the Form
706–QDT is otherwise required to be
filed under the provisions of this chapter. Failure to file timely the statement
may subject the QDOT to the rules of
paragraph (d)(1)(v) of this section.
(iii) Contents of statement. The written statement must contain the following
information—
(A) The name, address, and taxpayer
identification number, if any, of the U.S.
Trustee and the QDOT; and
(B) A list summarizing the assets
held by the QDOT, together with the
fair market value of each listed QDOT
asset, determined as of the last day of
the taxable year (December 31 if the
QDOT does not have a taxable year) for
which the written statement is filed. If
the look-through rule contained in paragraph (d)(1)(ii)(B) of this section applies, then the partnership, corporation,
trust or other entity must be identified
and the QDOT’s pro rata share of the
foreign real property and other assets
owned by that entity must be listed on
the statement as if directly owned by the
QDOT; and
(C) If a personal residence previously
subject to the exclusion under paragraph
(d)(1)(iv) of this section is sold during
the taxable year (or during the calendar
year if the QDOT does not have a
taxable year), the statement must provide the date of sale, the adjusted sales

23

price (as defined in section 1034(b)(1)),
the extent to which the amount of the
adjusted sales price has been or will be
used to purchase a new personal residence and, if not timely reinvested, the
steps that will or have been taken to
comply with paragraph (d)(1)(i) of this
section, if applicable; and
(D) If the personal residence ceases
to be used, or held for use, as a personal
residence by the surviving spouse during
the taxable year (or during the calendar
year if the QDOT does not have a
taxable year), the written statement must
describe the steps that will or have been
taken to comply with paragraph (d)(1)(i)
of this section, if applicable.
(4) Request for alternate arrangement
or waiver. If the Commissioner provides
guidance published in the Internal Revenue Bulletin (see § 601.601(d)(2) of
this chapter) pursuant to which a testator, executor, or the U.S. Trustee may
adopt an alternate plan or arrangement
to assure collection of the section 2056A
estate tax, and if the alternate plan or
arrangement is adopted in accordance
with the published guidance, then the
QDOT will be treated, subject to paragraph (d)(1)(v) of this section, as meeting the requirements of paragraph (d)(1)
of this section. Until this guidance is
published in the Internal Revenue Bulletin (see § 601.601(d)(2) of this chapter),
taxpayers may submit a request for a
private letter ruling for the approval of
an alternate plan or arrangement proposed to be adopted to assure collection
of the section 2056A estate tax in lieu
of the requirements prescribed in this
paragraph (d)(4).
(5) djustment of dollar threshold and
exclusion. The Commissioner may increase or decrease the dollar amounts
referred to in paragraph (d)(1)(i), (ii) or
(iv) of this section in accordance with
guidance published in the Internal Revenue Bulletin (see § 601.601(d)(2) of
this chapter).
(6) Effective date and special rules.
(i) This paragraph (d) is effective for
estates of decedents dying after February 19, 1996.
(ii) Special rule in the case of incompetency. A revocable trust or a trust
created under the terms of a will is
deemed to meet the governing instrument requirements of this paragraph (d)
notwithstanding that the requirements
are not contained in the governing instrument (or otherwise incorporated by
reference) if the trust instrument (or
will) was executed on or before November 20, 1995, and—

(A) The testator or settlor dies after
February 19, 1996;
(B) The testator or settlor is, on November 20, 1995, and at all times
thereafter, under a legal disability to
amend the will or trust instrument;
(C) The will or trust instrument does
not provide the executor or the U.S.
Trustee with a power to amend the
instrument in order to meet the requirements of section 2056A; and
(D) The U.S. Trustee provides a written statement with the federal estate tax
return (Form 706 or 706NA) that the
trust is being administered (or will be
administered) so as to be in actual
compliance with the requirements of this
paragraph (d) and will continue to be
administered so as to be in actual compliance with this paragraph (d) for the
duration of the trust. This statement
must be binding on all successor trustees.
(iii) Special rule in the case of certain irrevocable trusts. An irrevocable
trust is deemed to meet the governing
instrument requirements of this paragraph (d) notwithstanding that the requirements are not contained in the
governing instrument (or otherwise incorporated by reference) if the trust was
executed on or before November 20,
1995, and:
(A) The settlor dies after February
19, 1996;
(B) The trust instrument does not
provide the U.S. Trustee with a power
to amend the trust instrument in order to
meet the requirements of section 2056A;
and
(C) The U.S. Trustee provides a written statement with the decedent’s federal
estate tax return (Form 706 or 706NA)
that the trust is being administered in
actual compliance with the requirements
of this paragraph (d) and will continue
to be administered so as to be in actual
compliance with this paragraph (d) for
the duration of the trust. This statement
must be binding on all successor trustees.
§ 20.2056A–2T [Removed]
Par. 3a. Section 20.2056A–2T is removed.
PART 602—0MB CONTROL NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 4. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.

Par. 5. In § 602.101, paragraph (c) is
amended by:
1. Removing the following entry
from the table:
§ 602.101 OMB Control numbers.
*

*

*

*

*

(c) * * *
CFR part or section
where identified and
described

Current OMB
control No.

*
*
*
*
*
20.2056A–2T(d) . . . . . . . 1545–1443
*
*
*
*
*
2. Adding the following entry in numerical order to the table to read as
follows:
§ 602.101 OMB Control numbers.
*

*

*

*

*

(c) * * *
CFR part or section
where identified and
described

Current OMB
control No.

*
*
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20.2056A–2. . . . . . . . . . . 1545–1443
*
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Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved September 19, 1996.
Donald C. Lubick,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on
November 27, 1996, 8:45 a.m., and published in
the issue of the Federal Register for November 29,
1996, 61 F.R. 60551)

Section 6621.— Determination of
Interest Rate
26 CFR 301.6621–1: Interest rate

Interest rates; underpayments and
overpayments. The rate of interest determined under section 6621 of the
Code for the calendar quarter beginning
October 1, 1996, will be 8 percent for
overpayments, 9 percent for underpayments, and 11 percent for large corporate underpayments. The rate of interest
paid on the portion of a corporate
overpayment exceeding $10,000 is 6.5
percent.
Rev. Rul. 96–61
Section 6621 of the Internal Revenue
Code establishes different rates for inter-

24

est on tax overpayments and interest on
tax underpayments. Under § 6621(a)(1),
the overpayment rate is the sum of the
federal short-term rate plus 2 percentage
points, except the rate for the portion of
a corporate overpayment of tax exceeding $10,000 for a taxable period is the
sum of the federal short-term rate plus
0.5 of a percentage point for interest
computations made after December 31,
1994. Under § 6621(a)(2), the underpayment rate is the sum of the federal
short-term rate plus 3 percentage points.
Section 6621(c) provides that for purposes of interest payable under § 6601
on any large corporate underpayment,
the
underpayment
rate
under
§ 6621(a)(2) is determined by substituting ‘‘5 percentage points’’ for ‘‘3 percentage points.’’ See § 6621(c) and
§ 301.6621–3 of the Regulations on
Procedure and Administration for the
definition of a large corporate underpayment and for the rules for determining
the applicable rate. Section 6621(c) and
§ 301.6621–3 are generally effective for
periods after December 31, 1990.
Section 6621(b)(1) provides that the
Secretary will determine the federal
short-term rate for the first month in
each calendar quarter.
Section 6621(b)(2)(A) provides that
the federal short-term rate determined
under § 6621(b)(1) for any month applies during the first calendar quarter
beginning after such month.
Section 6621(b)(2)(B) provides that in
determining the addition to tax under
§ 6654 for failure to pay estimated tax
for any taxable year, the federal shortterm rate that applies during the third
month following such taxable year also
applies during the first 15 days of the
fourth month following such taxable
year.
Section 6621(b)(3) provides that the
federal short-term rate for any month is
the federal short-term rate determined
during such month by the Secretary in
accordance with § 1274(d), rounded to
the nearest full percent (or, if a multiple
of 1/2 of 1 percent, the rate is increased
to the next highest full percent).
Notice 88–59, 1988–1 C.B. 546, announced that, in determining the quarterly interest rates to be used for overpayments and underpayments of tax
under § 6621, the Internal Revenue Service will use the federal short-term rate
based on daily compounding because
that rate is most consistent with § 6621
which, pursuant to § 6622, is subject to
daily compounding.