Rev. Rul. 76-304

Advice has been requested whether a payment made to a decedent's surviving spouse by the decedent's employer is includible in the decedent's gross estate under section 2038(a)(1) of the Internal Revenue Code of 1954, under the circumstances described below.

On January 1, 1975, the decedent and X Corporation entered into an employment contract whereby, in consideration of the decedent's performance of services, the corporation agreed to pay decedent a stated yearly salary and also agreed to pay a death benefit of a stated amount to decedent's designated beneficiary if decedent was employed by the corporation at date of death. Under the terms of the agreement decedent could change the beneficiary of the payment during the course of employment with the corporation.

Upon decedent's death on September 12, 1975, while employed by the corporation the death benefit was paid to the decedent's surviving spouse.

The issue presented is whether the transfer requirement of section 2038(a)(1) of the Code is satisfied where a decedent-employee procured the transfer by such decedent's employer of a death benefit to the decedent's surviving spouse in return for the performance of services during the course of employment.

Section 2038(a)(1) of the Code provides that the value of the gross estate shall include the value of all property transferred by the decedent, in trust or otherwise, the enjoyment of which at the date of death is subject to any change through the exercise of a power, either alone or in conjunction with another person, to alter, amend, revoke or terminate the enjoyment of the beneficial interest in the property. Section 2038 does not apply to property interests that the decedent did not own and thus did not transfer.

If a decedent furnishes consideration for a transfer nominally made by another, the decedent will be in substance considered the actual transferor. Lehman v. Commissioner, 109 F. 2d 99 (2nd Cir. 1940). Upon decedent's death, the transferred property is includible in the decedent's gross estate if the decedent possesses at death an interest or power which, under the transfer sections of the Code, provides a basis for imposing the estate tax.

In Estate of Fried v. Commissioner, 445 F. 2d 979 (2nd Cir. 1971), aff'g 54 T.C. 805 (1970), cert. denied, 404 U.S. 1016 (1972), a decedent's transfer of such decedent's interest in partnership assets to a newly formed corporation was held to be consideration for the corporate-employer's transfer of stock of equivalent value to the decedent, and such employer's promise to pay disability and death benefits. In William L. Nevin, 11 T.C. 59 (1948), acq., 1949-1 C.B. 3, the decedent's promise to retire from a position with the corporate-employer from which decedent could not have been forced to retire was held to be consideration for the employer's promise to pay a sum certain over a term of years to decedent or decedent's surviving spouse.

Under the terms of the agreement executed in the instant case, the corporation was to pay a death benefit to the decedent's surviving spouse upon the decedent's death while still employed by the corporation. The corporation's promise to pay the death benefit was given in consideration of the decedent's promise to render future services, which the decedent discharged on a day-to-day basis during the course of decedent's employment career with X Corporation.

In Estate of Bogley v. United States, 514 F. 2d 1027 (Ct. Cl. 1975), the decedent entered into an enforceable contract with decedent's employer. Under this contract, the employer promised to pay decedent's spouse or decedent's estate two years' salary after death, in consideration for the decedent's past and future services. The court found that by making the contract with the employer, the decedent made a transfer of decedent's interest to decedent's spouse during decedent's lifetime.

Accordingly, the transfer requirement of section 2038(a)(1) of the Code is satisfied where the decedent procured the transfer by the decedent's employer of a death benefit to the decedent's surviving spouse in return for the performance of services during the course of employment. The amount of the death benefit will be includible in the decedent's gross estate, under section 2038(a)(1) of the Code, inasmuch as the decedent at date of death possessed the power to alter the designated beneficiary of the death benefit.