December 9, 2004

The Honorable Mark W. Everson
Commissioner
Internal Revenue Service
CC:PA:LPD:PR (REG-145988-03)
Room 5203
PO Box 7604
Ben Franklin Station
Washington, D.C. 20044

Hand Delivered to:

Courier's Desk
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, D.C. 20044

RE: Proposed Regulations (REG-145988-03) Regarding the Predeceased Parent Rule

1. Proposed Regulations Exceed Statutory Authority

2. Clarify Example

3. Clarify How Adoption Definitions Apply to this Test

Dear Commissioner Everson:

Enclosed are the American Institute of Certified Public Accountants comments regarding proposed regulations on the predeceased parent rule.  That rule provides an exception to the generation-skipping transfer (GST) tax generation assignment rules that assigns a higher generation to transferees when the parent of the transferee is deceased.  These proposed regulations also address transfers assigned to more than one generation.

In general, we believe that the regulations are thoughtful, well-written and will be useful guidance for the application of the rules that are addressed. However, there are certain areas deserving of revision or clarification that are discussed below.

Specifically, we suggest that final regulations include the following changes and clarifications:

1. Proposed Regulations Exceed Statutory Authority

Proposed Reg. Section 26.2651-1(b) would not apply the predeceased parent rule to transfers to collateral heirs if at the time of the transfer, "the transferor (or the transferor's spouse or former spouse [emphasis added[) has any living lineal descendant."  The parenthetical language is not in the Code and should be eliminated.

The proposed language of the regulation requires that lineal descendants of persons other than the transferor be absent before the deceased parent rule could apply to transfers to collateral heirs.  There is no specific language in the Code (nor any Congressional intent expressed in the Committee Reports) that indicates Congress intended to measure a generation skip between a transferor and that transferor's collateral descendants using someone else's lineal descendants.  To do so by regulation is unreasonable and will create unintended consequences.  For example, the proposed test places transferors with step-children and transferors with former spouses with children from subsequent marriages at a disadvantage.  It is doubtful that Congress intended the presence of stepchildren, let alone children born to a former spouse subsequent to the divorce from transferor, neither having any legally recognized relationship to the transferor or transferor's collateral descendants (and the latter of which could impose a very difficult factual determination on the part of the transferor), to defeat the application of the predeceased parent exception to the collateral heirs.

The new test ignores the underlying reasons for the GST tax - to prevent passing wealth down two generations and bypassing one level of estate tax.  If the transferor has no lineal descendants and the transferor's niece or nephew dies before the transferor, then a gift to the children of that predeceased niece or nephew (i.e., the transferor's great nieces and nephews) should not be subject to the niece or nephew's level of estate tax.  Adding this new test imposes a GST tax where none is intended.

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2. Clarify Example

Proposed Reg. Section 26.2651-1(c), Example 6, should be clarified by stating that the transferor in the example has no lineal descendants.  Absent this information, taxpayers will have difficulty determining that the predeceased parent rule would apply in this situation. This example would also be improved by referring to the donee and ancestors using relationship names, such as nieces/nephews, great nieces/nephews, and great grand nieces/nephews. The following revised example incorporates these suggestions:

Example 6. On January 1, 2004, T transfers $50,000 to a great grand niece, GGN, who is the great grandchild of B, a brother of T. At the time of the transfer, T has no lineal descendants and the parent of GGN is deceased. GGN's grandparent N, a child of B (T's nephew), is living. Because T has no living lineal descendants, the predeceased parent rule is applicable with respect to transfers to T's collateral heirs. As such, GGN will be treated as a member of the generation that is one generation below the lower of T's generation or the generation assignment of GGN's youngest living lineal ancestor who is also a descendant of the parent of the T. In this case, N is GGN's youngest living lineal ancestor who is also a descendant of the parent of T. Because N's generation assignment is lower than T's generation, GGN will be treated as a member of the generation that is one generation below N's generation assignment (i.e., GGN will be treated as a member of her parent's generation). As a result, GGN remains a skip person and the transfer to GGN is a direct skip.
 
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3. Clarify How Adoption Definitions Apply to this Test

Section 2651(b)(3)(A) contains a broader definition that treats a "legal adoption" as a direct, blood relationship for purposes of determining if a person is a lineal descendant.  Proposed Reg. Section 26.2651-2(b) provides a definition of an "adopted individual" for GST purposes for clarifying the lineal descendant's status in situations where a grandparent adopts their grandchild or great niece/nephew to raise them, even though the grandchild/niece/nephew's parent is still living. This latter definition is only applicable in this very limited context.

We suggest that the final regulations state that the definition within the regulation of an adopted individual is limited to situations covered in section 2651(f)(1) and is not intended to modify or further define the term "legal adoption" in section 2651(b)(3)(A).

We welcome the opportunity to discuss our comments further with you or others at the IRS.  Please contact me at (402) 280-2062; Roby Sawyers, Chair of the AICPA Trust, Estate, and Gift Tax Technical Resource Panel, at (919) 515-4443; David Dotson, Chair of the AICPA Predeceased Parent Task Force, at (215) 246-2537; or Eileen Sherr, AICPA Technical Manager at (202) 434-9256.

Sincerely,

Thomas J. Purcell, III
Chair, AICPA Tax Executive Committee

cc:   Lian A. Mito, Internal Revenue Service
       Catherine V. Hughes, Treasury Department

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