Rev. Rul. 74-557

Advice has been requested as to the applicable method to be used in determining the present value of the includible amount in the gross estate of decedent under section 2039 of the Internal Revenue Code of 1954 where a deceased Federal employee retired from Government service after December 31, 1951 but prior to January 1, 1971, and died on or after that date.

A Federal employee retired from Federal service on September 30, 1970, at age 60, and died on January 1, 1971. Upon retirement, he elected to receive for himself a reduced annuity of $500 per month and thereby provide a survivorship annuity of $275 per month payable to his wife. At the time of the decedent's retirement, and at the time of his death, his wife was aged 55 at her nearest birthday. Upon retirement, the decedent had contributed $15,000, with interest included, to the United States Civil Service Retirement System. Under the System, the Government's contributions are not credited to the accounts of the individual Federal employees. The United States Civil Service Retirement System is an employees trust which meets the requirements of section 401(a) of the Code. Rev. Rul. 68-486, 1968-2 C.B. 184.

Section 2039(a) of the Code provides that the decedent's gross estate shall include the value of an annuity receivable by any beneficiary by reason of surviving the decedent under any form of contract or agreement (other than insurance on the decedent's life) if, under such contract or agreement, an annuity was payable to the decedent, or the decedent possessed the right to receive such annuity for his life.

Section 2039(c) of the Code provides that there shall be excluded from the decedent's gross estate that portion of the value of the beneficiary's annuity that is attributable to contributions made by the decedent's employer to an employees' trust forming part of a pension plan which meets the requirements of section 401(a).

Section 20.2039-2(c)(1) of the Estate Tax Regulations provides that the amount to be excluded from the decedent's gross estate under section 2039(c) of the Code is an amount which bears the same ratio to the value, at the decedent's death, of the beneficiary's annuity as the employer's contribution to the plan on the employee's account bears to the total contributions to the plan on the employee's account.

Section 20.2039-2(c)(2) of the regulations provides that if the employer's contributions to a pension plan on the employee's account are not credited to the accounts of individual employees the total contributions to the plan on the employee's account cannot be readily ascertained. In order to apply the ratio referred to in the above paragraph, the total amount of contributions to the plan on the employee's account is the value of any annuity or other payment payable to the decedent and his survivor as of the time the decedent's rights first mature (or as of the time the survivor's rights first mature if the decedent's rights never mature), computed in accordance with the rules set forth in sections 20.2031-7, 20.2031-8, 20.2031-9, and 20.2031-10 of the regulations.

In arriving at the value of the gross estates of decedents dying after December 31, 1951 but on or before December 31, 1970, annuities, etc., are to be valued on the basis of U.S. Life Table 38, with interest at 31/2 percent a year, and the American Remarriage Table, if applicable. Section 20.2031-7 of the regulations. For decedents dying after December 31, 1970, annuities are to be valued on the basis of Table LN, with interest at 6 percent a year, and the American Remarriage Table, if applicable. Section 20.2031-10 of the regulations.

A retiring Federal employee who elects, under the Civil Service Retirement System, to take a reduced annuity for himself and thereby provide a survivorship annuity for the designated beneficiary is deemed to have made a gift to the beneficiary. The retiring employee's rights first mature, and the transfer to the beneficiary occurs, at the time the election and designation become irrevocable, which is the time when the Civil Service Commission approves his annuity claim. Since the Government's contributions to the retirement plan on the employee's account (and thus the total contributions to the plan on the employee's account) cannot be readily ascertained, the total value of both annuities, computed in accordance with the applicable gift tax regulations, is considered to be the total contributions. Rev. Rul. 70-514, 1970-2 C.B. 198. If the Federal employee retired after December 31, 1951 but before December 31, 1970, the present values of both annuities are actuarially computed on the basis of U.S. Life Table 38, with interest at 31/2 percent a year, and the American Remarriage Table, if applicable. Section 25.2512-5 of the Gift Tax Regulations. If the employee retired after December 31, 1970, the annuity values are computed on the basis of Table LN, with interest at 6 percent a year, and the American Remarriage Table, if applicable. Section 25.2512-9 of the regulations.

An election to take a reduced annuity in order to provide a survivorship annuity to a designated beneficiary, which results in the recognition of a gift for Federal gift tax purposes, is the same transaction that creates the survivorship annuity interest in the beneficiary the value of which is includible in the decedent's gross estate under section 2039(a) of the Code. The value of the decedent's annuity and that of his designated beneficiary, computed as of the time their rights first mature, is the denominator of the contributions ratio used to determine the value of the decedent's gift and the portion of the annuity interest includible in his gross estate, because that ratio is fixed at the time when all contributions to the plan have ceased. Therefore, section 20.2039-2(c)(2) of the regulations requires the use of different actuarial valuation tables to compute the present value of the includible portion of a civil service annuity interest in the gross estate of a deceased Federal employee who retires from government service before 1971 and dies after 1970.

Accordingly, in the instant case, the applicable method to be used in determining the amount of the civil service survivorship annuity includible in the decedent's gross estate, under section 2039 of the Code, is as follows:

 1. Value of decedent's annuity at retirement