Rev. Rul. 66-348

Advice has been requested as to the effect on the value of the gross estate of sales of minerals made within 1 year after the decedent's death, in a case where the alternate method of valuation authorized by section 2032 of the Internal Revenue Code of 1954 is elected by the executor. It is contended that, in view of the fact that income earned subsequent to a decedent's death cannot be reflected in his gross estate, the value of the minerals sold is includible in gross estate only to the extent of the statutory depletion allowance applicable under section 611 of the Code, since the balance of the sales proceeds will be subject to the income tax.

Under section 2031 of the Code the value of every item of property includible in the decedent's gross estate is its fair market value at the time of the decedent's death, except that if the executor elects the alternate valuation method, under section 2032 of the Code, it is the fair market value thereof at the date, and with the adjustments, prescribed in that section. Section 20.2031-1(b) of the Estate Tax Regulations. Section 2032 of the Code does not precribed any adjustment in the valuation of property includible in the decedent's gross estate by virtue of any subsequent income tax treatment thereof.

Section 20.2032-1(d) of the regulations provides, in part, that if the executor elects the alternate valuation method, all property interests existing at the date of the decedent's death which form a part of his gross estate as determined under sections 2033 through 2044 of the Code are valued in accordance with the provisions of section 2032 of the Code. These property interests are referred to as `included property.' The property remains `included property,' under the alternate valuation method, even though it changes in form during the year following the decedent's death by being actually received or disposed of, in whole or in part. On the other hand, property earned or accrued, during the alternate valuation period, with respect to any property interest existing at the date of his death `which does not represent a form of `included property' itself or the receipt of `included property' is excluded in valuing the gross estate under the alternate valuation method.' Such property is referred to as `excluded property.'

The extraction and sale of minerals from a mineral interest, which formed a part of the decedent's gross estate, during the alternate valuation period is marely a change in the form of `included property.' It is clear that no portion of the physical assets sold is `excluded property.' Consequently, the full mineral interest must be reflected in the valuation of the decedent's gross estate. While the valuation of property for estate tax purposes may have a bearing on the income tax consequences of subsequent transfers of the propety, there is no provision in section 2031 or section 2032 of the Code whereby the income tax consequences of subsequent transfers may be given effect in the estate tax valuation of the property.

Therefore, 100 percent of the units of mineral production sold during the alternate valuation period is `includible property,' and the valuation thereof is made without regard to the statutory depletion allowable for income tax purposes. Thus, the quantity of minerals extracted and sold or otherwise disposed of within 1 year after the decedent's death will be valued, under section 2032 of the Code, at its `in place' value as of the date of disposition, and the full amount of such value is includible in the decedent's gross estate (plus the fair market value of the remaining mineral interest, valued as of 1 year after death).

Section 1.691(a)-1(b) of the Income Tax Regulations defines the term `income in respect of a decedent' as `amounts to which a decedent was entitled as gross income but which were not properly includible in computing his taxable income for the taxable year ending with the date of his death or for a previous taxable year under the method of accounting employed by the decedent.' Emphasis added.

Proceeds received by the estate from the extraction and sale of minerals during the alternate valuation period do not constitute `amounts to which a decedent was entitled as gross income,' and therefore cannot give rise to a deduction by the estate (or any of the beneficiaries) under section 691(c) of the Code for estate tax attributable to income in respect of a decedent.

Where the executor is required to include in the gross estate for estate tax purposes the value of mineral production sold during the alternate valuation period, such inclusion would be reflected in the estate's (or the beneficiaries') adjusted basis for the mining interest under section 1011 of the Code for the purpose of determining gain or loss from the sale or other disposition of the property. (See sections 612, 1011 and 1014(a) of the Code.) The estate (or the beneficiaries) are permitted to recover this basis for income tax purposes through the allowance for depletion provided by section 611 of the Code, based either on cost depletion (section 612) or percentage depletion (section 613) whichever results in the greater allowance (section 1.611-1(a)(1) of the regulations).