Rev. Rul. 67-371

Advice has been requested whether the value of the proceeds of insurance policies taken out of the life of a decedent by the trustee of a noncontributory profit-sharing plan, which is a qualified plan under section 401(a) of the Internal Revenue Code of 1954, is includible in the decedent's gross estate under section 2042 of the Code or excludable under section 2039(c).

The decedent was an employee of the X company and a participant in its trusteed, qualified profit-sharing plan at the time of his death. The overall plan provided for the purchase of ordinary paid up life insurance policies on the lives of all participating employees with funds contributed solely by the employer. Two such policies were purchased by the trustee of the plan on the life of the decedent under which the decedent retained the right at all times to change the designated beneficiary.

In the event a participant terminated his employment other than by death, the trustee was required to convert the life insurance contracts of that participant into annuities or to surrender the contracts for their cash values and distribute the lump sum to the participant.

The full annual cost of providing term life insurance protection under any qualified pension or profit-sharing trust represents a current distribution to the insured employee concerned. See sections 1.72-16 and 1.402(a) 1(a) of the Income Tax Regulations; Raymond J. Moore et al. v. Commissioner , 45 B.T.A. 1073; and Rev. Rul. 54-52, C.B. 1954-1, 150, as amplified by Rev. Rul. 56-634, C.B. 1956-2, 291.

In view of the income tax approach whereby the employee is subject to tax on the current cost of life insurance protection purchased for him by the employees' trust, the basic question is whether the aforesaid insurance proceeds fall within the scope of section 2039(c) of the Code.

Section 2039(c) of the Code provides, in substance, that the value of an annuity or other payment receivable by any beneficiary of a decedent (other than his executor) under certain trusts and plans as described therein, shall be excluded from the value of a decedent's gross estate for the purpose of the Federal estate tax, to the extent that the value of such annuity or other payment is attributable to contributions made by the decedent's employer or former employer under such trust or plan.

Section 2042 of the Code provides for the inclusion in the gross estate of all amounts receivable as insurance under policies on the life of the decedent with respect to which the decedent possessed any of the incidents of ownership at the time of his death. If this provision were to be considered alone, and without reference to any possible conflict with section 2039(c), it would thus seem to constitute more than ample authority for including all the above insurance proceeds as part of the decedent's gross estate because a continuing right to change the beneficiary of an insurance policy is undoubtedly an incident of ownership with respect thereto, as section 20.2042-1(c)(2) of the Estate Tax Regulations expressly provides.

However, the opening phrase of section 2039(c) expressly requires that the exclusion therein provided shall be given controlling effect over any other `provision of law' at variance therewith. Such a conclusion appears to be entirely consistent with the overall wording of section 2039 as well as directly supported by a certain illustrative example which is set out in section 20.2039-2(b) of the regulations and reads as follows:

Example (3 ).-Pursuant to a pension plan, the employer made contributions to a trust which were used by the trustee to purchase a contract from an insurance company for the benefit of an employee. The contract was to provide the employee, upon his retirement at age 65, with an annuity of $100 per month for life, and was to provide his designated beneficiary, upon the employee's death after retirement, with a similar annuity for life. The contract further provided that if the employee should die before reaching the retirement age, a lump sum payment equal to the greater of (a) $10,000 or (b) the reserve value of the policy would be paid to his designated beneficiary in lieu of the annuity described above. Assume that the employee died before reaching the retirement age and that at such time the plan met the requirements of section 401(a). Since the designated beneficiary's lump sum payment was receivable under a qualified pension plan, no part of such lump sum payment is includible in the decedent's gross estate by reason of the provisions of section 2039(c). It should be noted that for purposes of the exclusion under section 2039(c), it is immaterial whether or not such lump sum payment constitutes the proceeds of life insurance under the principles set forth in paragraph (d) of [Section] 20.2039-1.

The term `other payment' as used in section 2039 of the Code contemplates payments in cash or property. The mere fact that the payment under a qualified plan represents the proceeds of an insurance policy on the life of the decedent would not in and of itself operate to deprive the decedent's estate of the exclusion benefit provided by section 2039(c) of the Code.

The mere fact that a definite, ascertainable portion of each employer contribution or payment under some qualified pension or profit-sharing plan was concurrently includible in the decedent's gross income (because of being used to procure life insurance coverage for his benefit from year to year, and was therefore required to be treated as consideration `contributed by the employee' for the limited income tax purposes contemplated by section 72(f)), does not provide a sufficient basis for treating such sums as amounts `contributed by the decedent' for the purpose of making any insurance proceeds attributable thereto ineligible for a section 2039(c) exclusion from the decedent's gross estate.

Accordingly, it is held that amounts receivable under the described profit-sharing plan, which would otherwise be includible in the gross estate of the deceased insured because they constitute the proceeds of life insurance policies wherein the decedent was holding one or more incidents of ownership at the time of his death within the meaning of section 2042 of the Code, are nonetheless excludable from the decedent's gross estate under section 2039(c) of the Code.

Whether section 2039(c) of the Code is applicable to exclude a decedent's community property interests in a profit-sharing trust from the gross estate. See Rev. Rul. 67-278, page 226.