Rev. Rul. 67-53

Advice has been requested regarding the allowance of the credit for Federal estate tax paid on prior transfers under section 2013 of the Internal Revenue Code of 1954, where, at the time of the transferor's death, the property interest of the transferee was not susceptible of valuation by recognized valuation principles.

A grantor created a trust during his lifetime under the terms of which he reserved the right to net income for his life. The trust instrument provided that at his death net income was payable to the grantor's wife for life, subject to the power of the trustee, in his absolute and uncontrolled discretion, to withhold any or all of such income and to add all or any part of it to the principal of the trust. The instrument also provided that at the grantor's death or at the death of his wife, whichever occurred last, the principal and any accumulated income of the trust were to be paid to the grantor's then living children. At the grantor's death the principal of the trust was includible in his gross estate for Federal estate tax purposes. Thereafter, the trustee annually paid out the entire amount of net income of the trust to the wife of the grantor until her death.

Section 2013(a) of the Code provides, in part, that the tax imposed by section 2001 of the Code shall be credited with all or a part of the amount of the Federal estate tax paid with respect to the transfer of an interest in property to a decedent (designated as a transferee) from a person (designated as a transferor) who died within 10 years before, or within 2 years after, the decedent's death. The amount of the credit is based upon the value of the property used for the purpose of determining the Federal estate tax of the transferor, notwithstanding the fact that the property transferred cannot be identified in, or traced through, the transferee's estate. See Rev. Rul. 59-9, C.B. 1959-1,232.

Section 20. 2013-4(a) of the Estate Tax Regulations provides that if a transferee received a life estate or a remainder or other limited interest in property included in the transferor's gross estate the value of such an interest is determined as of the date of the transferor's death on the basis of recognized valuation principles. Any action, transaction, or event occurring subsequent to the death of the transferor is not to be taken into account in the valuation of such transferred property.

Where a trustee possesses the power, in his absolute and uncontrolled discretion, to pay out net income to the income beneficiary of a trust or to accumulate such income, the beneficiary's interest cannot be valued according to recognized valuation principles as of the date of the transferor's death. Therefore, notwithstanding the fact that such income was actually paid to the decedent-transferee, the credit for tax on prior transfers under section 2013 of the Code is not allowable with respect to such an interest.