Rev. Rul. 70-292

Advice has been requested regarding the allowance of a credit under section 2013 of the Internal Revenue Code of 1954 for the Federal estate tax paid on a prior transfer to a decedent-transferee who died within the period specified in section 2013.

Under the terms of the transferor's will, he bequeathed his residuary estate to a trustee to pay the entire income to the transferor's daughter, the decedent-transferee. The trustee is empowered to use so much of the income of the residuary trust for the benefit of the transferor's surviving spouse as he deems necessary for her comfort, support, hospital, or medical expenses. At the date of the transferor's death, his surviving spouse had substantial means and an independent income which was more than adequate to take care of her needs.

Section 2013 of the Code provides 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 the decedent (designated as a transferee) from a person (designated as a transferor) who died within ten years before, or within two years after, the decedent's death. The amount of the credit for tax paid on prior transfers is based upon the value of the transferred property as used in the transferor's estate for the purpose of determining his Federal estate tax liability.

It is not necessary that the property transferred be identified in, or traced through, the transferee's estate. A life estate or a remainder or otherwise limited interest in property included in the transferor's gross estate qualifies for the credit, even though it is not includible in the gross estate of the transferee. Rev. Rul. 59-9, C.B. 1959-1, 232. The value of such an interest is determined as of the date of the transferor's death on the basis of recognized valuation principles. Section 20.2013-4 of the Estate Tax Regulations.

In arriving at the value of the interest transferred, the governing principles are analogous to those applicable to the valuation of property interests transferred for public, charitable, or religious uses. Section 20.2055-2(a) of the regulations provides that a deduction may be allowed for the value of a limited interest in property transferred to charity only insofar as that interest is presently ascertainable, and hence severable from the noncharitable interest. Where a transfer of an income or remainder interest is subject to a power of diversion or invasion for noncharitable purposes, the exercise of such power must be limited to a definitely ascertainable standard. If the words used in describing the power do not create such a standard, no deduction whatever is allowable. Merchants National Bank of Boston v. Commissioner, 320 U.S. 256 (1943), Ct. D. 1591, C.B. 1943, 1123.

An ascertainable standard has been inferred where the language of the instrument relates to the beneficiary's accustomed manner of living. Ithaca Trust Company v. United States, 279 U.S. 151 (1929), Ct. D. 61, C.B. VIII-1, 313 (1929). If the instrument does not specifically limit the power of invasion to the accustomed standard of living of the beneficiary, such a restriction will be implied where the power is limited by such words as "comfort and support" or "hospital or medical expenses." Such an interpretation will be made if it is consistent with applicable local law and other language of the instrument does not require a different construction. Rev. Rul. 54-285, C.B. 1954-2, 302.

In this case, the trustee's discretionary power to divert income of the residuary trust for the benefit of the surviving spouse can occur only if such diversion is necessary for her comfort, support, hospital or medical expenses. Thus, the power of diversion is impliedly limited by a definite standard. In addition (under the circumstances of this case), as of the date of the transferor's death, the likelihood of any diversion is so remote as to be negligible.

In view of the foregoing, it is concluded that the transferee's income interest in the trust property is capable of valuation. Therefore, it is held that the credit for tax on prior transfers authorized by section 2013 of the Code is allowable with respect to such interest. For the situation where the bequest is not susceptible of valuation, see Rev. Rul. 67-53, C.B. 1967-1, 265.