Rev. Rul. 77-222

Advice has been requested as to the income tax consequences of the contribution (rollover) of the proceeds of an employees' pension plan into an individual retirement account, under the circumstances described below. Advice has also been requested as to the estate tax treatment of the distribution from the individual retirement account on the death of the owner, under the circumstances described below, where the owner died after December 31, 1976.

A for many years had been an employee of the M company and a participant in the company's noncontributory employees' pension plan, a plan qualified under section 401(a) of the Internal Revenue Code of 1954. Upon retirement, A's participation in the plan was terminated and the amount credited to A's account was withdrawn. Thereupon, A delivered the proceeds received from the pension fund to the Y trust company for investment as an individual retirement account meeting the requirements of section 408 of the Code. A made no additional contributions to the individual retirement account. Upon A's death in 1977, B, A's spouse, began receiving an annuity under the payment provisions of the account. The annuity was payable in equal periodic installments over B's lifetime.

Section 402(a)(5) of the Code provides for the tax-free rollover of a lump-sum distribution from an employee's trust qualified under section 401(a) to an individual retirement account qualified under section 408 if the transfer is completed within 60 days of distribution. A "lump-sum distribution" is defined generally in section 402(e)(4)(A) of the Code as a distribution or payment from a qualified employees' trust described in section 401(a) and tax-exempt under section 501(a), within one taxable year of the receipt, of the balance to the credit of an employee which becomes payable to the recipient (1) on account of the employees' death, (2) on account of the employees' separation from the service, (3) after the employee becomes disabled, or (4) after the employee attains age 591/2.

In the instant case, the distribution to A consisted of the total amount credited to A's account and was made on account of A's separation from service. The distribution was therefore a lump-sum distribution under section 402(e)(4)(A) of the Code. Since the distribution was made from a retirement plan which met the qualification requirements of section 401(a) at the time of the distribution, and the distribution was immediately transferred to an individual retirement account satisfying the requirements of section 408, the distribution meets the tax-free rollover requirements of section 402(a)(5). Therefore, the distribution is not includible in A's gross income.

Regarding the estate tax treatment of the annuity payments commencing on A's death, section 2039(a) and (b) of the Code provides that a decedent's gross estate includes the value of an annuity or other payment receivable by any beneficiary by reason of surviving the decedent, under certain contracts or agreements, to the extent that the value of the annuity or other payment is attributable to contributions made by the decedent or the decedent's employer.

However, section 2039(c) of the Code provides an exclusion from the decedent's gross estate for certain distributions receivable by any beneficiary (other than the executor) under certain specified plans, trusts or annuity contracts, described in section 2039(c)(1) through 2039(c)(4). The legislative history accompanying the Employee Retirement Income Security Act of 1974 indicates that the exclusion provided in section 2039(c) is not applicable to payments receivable under an individual retirement account. S. Rep. No. 93-383, 93rd Cong., 1st Sess. 135 (1973), 1974-3 (Supplement) C.B. 214; H.R. No. 93-807, 93rd Cong., 2nd Sess. 138 (1974), 1974-3 (Supplement) C.B. 373.

Section 2039(e) of the Code, which was added by the Tax Reform Act of 1976 and is applicable only in the case of decedent's dying after December 31, 1976, (Pub. L. No. 94-455, section 2009(c)(3)(A), 90 Stat. 1896 (1976) [1976-3 C.B. (Vol. 1) 369]), provides specific rules for the estate taxation of distributions from individual retirement accounts, individual retirement annuities, and individual retirement bonds. The section state: Notwithstanding the provisions of this section or of any other provision of law, there shall be excluded from the value of the gross estate the value of an annuity receivable by any beneficiary (other than the executor) under--

(1) an individual retirement account described in section 408(a).

(2) an individual retirement annuity described in section 408(b), or

(3) a retirement bond described in section 409(a).

However, the section further provides that, if the amounts payable to the beneficiary are attributable to any extent to amounts contributed to the plan which were not allowable as a deduction under section 219 of the Code and which were not rollover contributions described in section 402(a)(5), 403(a)(4), or 409(b)(3)(C), then no exclusion is allowable for the proportionate value of such payments. Section 2039(e) also requires that the only form of payout which will be eligible for the exclusion is an "annuity", defined as follows:

For purposes of this subsection, the term "annuity" means an annuity contract or other arrangement providing for a series of substantially equal periodic payments to be made to a beneficiary (other than the executor) for his life or over a period extending for at least 36 months after the date of the decedent's death.

As noted above, the exclusion provisions of section 2039(c) of the Code are not applicable to distributions from individual retirement accounts. Consequently, if A had died prior to January 1, 1977, the effective date of section 2039(e), the entire amount distributed under the individual retirement account would have been includible in A's gross estate under section 2039(a) and (b).

In the instant case, A died after December 31, 1976, therefore the provisions of section 2039(e) are applicable. The plan was funded with a rollover contribution described in section 402(a)(5), and the payout meets the definition of an "annuity" contained in section 2039(e).

Accordingly, the present value of the amount payable to the annuitant, B, is excluded from A's gross estate.