Rev. Rul. 77-95

Advice has been requested whether, under the circumstances described below, any amount is includible in the decedent's gross estate under section 2039(a) of the Internal Revenue Code of 1954 with respect to an annuity payable to the decedent's surviving spouse under the United States Civil Service Retirement System.

The decedent entered into Federal Government service in 1925 and retired in 1965. The decedent died in 1976, survived by a spouse who became entitled to receive an immediate annuity of $500 a month, the present value of which was $75,000.

Section 2039(a) of the Code provides:

The gross estate shall include the value of an annuity or other payment receivable by any beneficiary by reason of surviving the decedent under any form of contract or agreement entered into after March 3, 1931 (other than as insurance under policies on the life of the decedent), if, under such contract or agreement, an annuity or other payment was payable to the decedent, or the decedent possessed the right to receive such annuity or payment, either alone or in conjunction with another for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death.

Section 20.2039-1(b) of the Estate Tax Regulations defines the term "contract or agreement" to include any arrangement, understanding or plan, or any combination of arrangements, understandings or plans arising by reason of the decedent's employment.

The specific question presented in the instant case is whether, in view of the fact that the decedent entered into Federal Government service in 1925, the surviving spouse's annuity is receivable under "any form of contract or agreement entered into after March 3, 1931."

Under the Civil Service Retirement Act applicable to the retiree in this case, a married Civil Service retiree receives a reduced annuity in order to provide his/her spouse with survivorship benefits unless the retiree expressly elects upon retirement a full annuity without survivorship benefits. Once the retiree makes a binding election, which occurs at the time the Civil Service Commission approves the retiring employee's claim for an annuity, the retiree may not revoke or change the election or name another survivor. Survivorship benefits were first incorporated in the Civil Service Retirement Act by an amendment dated August 4, 1939, which became effective January 1, 1940. Thus, a "contract or agreement" by which the surviving spouse receives the annuity that arose by reason of the decedent's employment could not have been entered into prior to that January 1, 1940 date. See Estate of Henry C. Beal, 47 T.C. 269 (1966), acq., 1967-2 C.B. 1.

In view of the foregoing, the annuity payable to the decedent's surviving spouse is receivable under a contract or agreement entered into after March 3, 1931. Accordingly, except to the extent provided in section 2039(c) of the Code (dealing with the exemption of annuities payable under "qualified plans"), the annuity payable to the surviving spouse is includible in the value of the decedent's gross estate under section 2039(a).