Rev. Rul. 66-20

Advice has been requested whether the value of the right of decedent's estate to receive for a period of years after decedent's death a share of the income of the partnership of which he was a member is includible in his gross estate for Federal estate tax purposes under the circumstances described below.

At the time of his death, decedent, aged 55, was a general partner in a public accounting firm. The business of the firm consists entirely of the performance of personal services by its partners and staff members and there are no income-producing investments or properties.

The partnership agreement provides that in the event of the death of a partner there shall be paid to the representatives of his estate his share of the capital of the firm, his unwithdrawn share of the net earnings, and his share of the net earnings for the fiscal year ending with the date of his death. The agreement further provides that in the event of the death of a partner before attaining the age of 60 years, in addition to the payments mentioned above, there shall be paid to his estate each year for 10 years a portion of the net earnings of the partnership for each such year equal to one-tenth of the decedent's percentage of such earnings for either the first or second fiscal year next preceding his death, subject to a prescribed minimum annual payment.

Section 2033 of the Internal Revenue Code of 1954 provides that the value of the gross estate shall include the value of all property to the extent of the decedent's interest therein at the time of his death.

The leading case dealing with agreements between business associates as to payments of post-mortem profits to the estate of a deceased associate is Bull, Executor v. United States , 295 U.S. 247 (1935), Ct. D. 969, C.B. XIV-1, 310 (1935). In this case, the enterprise required no capital and none was ever invested by the partners. In the partnership agreement it was provided that in the event a partner died, the survivors might continue the business for one year thereafter and his estate should `receive the same interests, or participate in the losses to the same extent' as the deceased partner would, if living. The agreement further provided that the estate should have the option of withdrawing from the firm but the representative of the estate did not exercise the option, and the business was continued as contemplated by the agreement. The Supreme Court of the United States held that the payments of partnership income earned after the death of the deceased partner were income to the estate; however, there was nothing which could be taxed to the decedent's estate under the estate tax.

The partnership agreement in the instant case, unlike the agreement in the Bull case, does not contemplate that the estate of the deceased partner shall continue as a partner and maintain precisely the same status with respect to the firm as decedent had in respect of profits and losses. Instead, as in the case of Charles F. Coates, et al. v. Commissioner , 7 T.C. 125 (1946), acquiescence, C.B. 1946-2, 2, the instant agreement provides that a deceased partner's estate is to receive decedent's share of the capital and the income earned and accrued to the date of death and, in addition thereto, that his estate is to receive a share of the profits earned for the specified period of years after his death. In the Coates case, the Tax Court of the United States pointed out that provisions of this kind are `intended to be in the nature of a mutual insurance plan, the disadvantage of which each partner was willing to accept in consideration of a similar commitment for his benefit on the part of all other partners, and, in part, as further compensation for the past services of the deceased partner payable after his death.' See Senate Report No. 1622; Eighty-third Congress, Second Session, at page 405, pertaining to section 753 of the Code, where it is stated:

* * * Thus, while a successor in interest of a decedent partner will be required to include in gross income amounts received from the partnership which are attributable to the value of the decedent's interest in unrealized fees or mutual insurance, the recipient will at the same time receive a deduction for the estate tax paid with respect to the inclusion of such rights to income in the decedent's estate . Emphasis added.

In view of the foregoing, it is clear that under the terms of the instant partnership agreement, the deceased partner acquired, among other things, a contractual right to have a share of partnership income earned after his death paid to his estate for a specified period which right at the time of his death passed to the executors of his estate.

The conclusion in this case is consistent with the decisions in the cases of Estate of Charles A. Riegelman, et al. v. Commissioner , 27 T.C. 833 (1957), affirmed 253 Fed. (2d) 315 (1958); Alice B. Winkle, Executrix , v. United States , 160 Fed. Supp. 348 (1958). Accordingly, it is held that such right is property in which the decedent had an interest at the time of his death within the meaning of section 2033 of the Code, the value of which must be included in his gross estate for Federal estate tax purposes.