Rev. Rul. 60-70

Advice has been requested whether annuities, lump-sum payments, and residual death benefits, payable under section 5 of the Railroad Retirement Act of 1937, as amended, 45 U.S.C. 228(a), to survivors of a deceased railroad employee, are includible in such employee's gross estate for Federal estate tax purposes.

Under section 5 of the Railroad Retirement Act of 1937, as amended, every employee who contributes to the railroad retirement system will obtain in benefits, either directly, or through his designated beneficiaries, his survivors, or his estate, an amount at least equal to the contributions which he has made in the form of payroll taxes withheld from his wages. Thus, under section 5(a) of the Act, a qualified widow or widower of a completely insured employee, upon attaining the age of sixty, is entitled, for life or until remarriage, to a monthly annuity computed on the basis of the deceased employee's wages.

For the widow who does not qualify under section 5(a) of the Act and for children and parents of deceased employees, similar annuities are provided under subsections (b), (c), and (d) of section 5 of the Act. If there are no qualified beneficiaries under the foregoing provisions, a lump-sum payment is made under section 5(f)(1) of the Act to the employee's widow or widower, children, parents, or the person who pays the burial expenses of the decedent.

Section 5(f)(2) of the Act provides that if no benefits, with certain exceptions, are otherwise payable, a lump sum, known as a residual death benefit, is payable upon the death of an employee to those persons designated by the employee or, if no designation is made, to the persons in the order prescribed in section 5(f)(1) of the Act, or, in the absence of such persons, to the employee's estate.

At approximately the same time that Congress passed the Railroad Retirement Act of 1937, a companion act, the Carriers Taxing Act of 1937, 45 U.S.C. 261, approved June 29, 1937 (now the Railroad Retirement Tax Act, sections 3201-3233 of the Internal Revenue Code of 1954) was enacted. The purpose of that Act was to supply the revenue necessary to finance the Railroad Retirement Act of 1937.

Under section 3201 of the Code, a tax is imposed on the wages of the employee. Under section 3221 of the Code, an excise tax is imposed on the railroad employer. The taxes collected are then paid into the general fund of the Treasury. Section 15(a) of the Railroad Retirement Act of 1937 authorizes an appropriation to the Railroad Retirement Account for each fiscal year of an amount sufficient for the payment of the benefits payable under the Act.

Section 2039(a) of the Code provides for the inclusion in the decedent's gross estate, for Federal estate tax purposes, of the value of an annuity or other payment receivable by any beneficiary by reason of surviving the decedent under any form of contract or agreement, other than insurance on the decedent's life, if, under such contract or agreement, an annuity or other payment was payable to the decedent, or the decedent possessed the right to receive such benefits for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death.

The term `contract or agreement,' as used in section 2039 of the Code, includes any arrangement, understanding or plan, or any combination of these arising by reason of the decedent's employment. See section 20.2039-1(b)(1) of the Estate Tax Regulations. The survivorship annuities and lump-sum death benefits payable under the Railroad Retirement Act of 1937 are paid under a public law enacted by Congress, rather than under any form of contract or agreement entered into by a decedent or arising by reason of his employment.

The amounts collected under sections 3201 and 3221 of the Code are taxes and not mere contributions and are not set aside for the payment of benefits under the Act. Rather, benefits are payable from appropriations made each year by Congress. In view of the foregoing, the legislative history and the general statutory scheme of the Railroad Retirement Act of 1937, it is clear that the Act does not constitute a `contract or agreement' within the meaning of section 2039 of the Code.

Accordingly, it is held that any annuity or other payment made to any person under subsections (a), (b), (c), (d), or (f)(1) of section 5 of the Railroad Retirement Act of 1937, as amended, is not includible in the gross estate of a deceased railroad employee under section 2039 of the Code. It is further held that any such annuity or other payment, made pursuant to such subsections, is not includible in the decedent's gross estate for estate tax purposes under any other section of the Code for the reason that the decedent had no control over the designation of the beneficiary or the amount of such payment, since these are fixed by statute and since the decedent had no property interest in the fund from which such annuity or other payment is made. Compare E.T. 18, C.B. 1940-2, 285, and Rev. Rul. 55-87, C.B. 1955-1, 112. However, the value of payments made under section 5(f)(2) of the Act, in which the decedent may designate the beneficiary, are includible in the decedent's gross estate under section 2033 of the Code as property in which the decedent had an interest at the time of his death. Compare E.T. 10, C.B. 1937-2, 469.

This ruling is not affected by section 12 of the Railroad Retirement Act of 1937, which provides that the annuity or pension payments shall not be subject to tax. The Federal estate tax is an excise tax on the transfer of property at death and not a tax on the property transferred. Therefore, section 12 of the Act does not preclude the inclusion of these latter amounts in the decedent's gross estate for Federal estate tax purposes. United States Trust Co. of New York v. Helvering , 307 U.S. 57, Ct. D. 1396, C.B. 1939-1 (Part 1), 330.