Rev. Rul. 78-151

Advice has been requested as to the amount includible in a decedent's gross estate under section 2039(a) of the Internal Revenue Code by reason of a survivor's annuity payable to the decedent's spouse under a qualified pension plan.

The decedent, A, was employed by State X until A's retirement in 1973. Before A's retirement, A was a participant in the State X employee pension plan, a plan that meets the requirements of section 401(a) of the Code.

Under the provisions of the plan, State X contributes to the fund a stated percentage of the total compensation paid to participating employees. A participating employee may contribute a percentage of the employee's annual compensation to the pension fund. The contributions of a participating employee and State X are deposited in the same trust fund. However, the contributions made by a participating employee and the increments thereon are at all times segregated, separately maintained, and precisely determinable. The contributions made by State X are also separately maintained in a segregated account.

Under the provisions of the plan, an employee eligible for retirement may elect to receive retirement benefits under one of several options. One option consists of a refund to the employee of all employee contributions and accrued interest along with a pension to the retired employee and an annuity to the employee's surviving spouse. The pension and survivor annuity amounts payable under this option are less than pension and survivor annuity amounts available under other options of the plan since the amount payable under this option is based solely upon employer contributions.

At A's retirement, A elected to receive retirement benefits under the above option. A received a lump sum payment of 15x dollars as the refund of A's contributions and increments thereon and a pension during A's life. At A's death in 1977, A's spouse was entitled to receive an annuity for the spouse's life.

Section 2039(a) of the Code provides, in part, 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, if the annuity or other payment was payable to the decedent for life.

Section 2039(b) of the Code provides, in part, that the value of the annuity or other payment is includible in the gross estate in the proportion that contributions to the purchase price by the decedent and the decedent's employer (if by reason of employment) bear to the total purchase price.

Section 2039(c), as amended by the Tax Reform Act of 1976 [Pub.L. 94-455, sec. 2009, 1976-3 (Vol. 1) C.B. 1, 369], provides in part:

Notwithstanding the provisions of this section or of any provision of law, there shall be excluded from the gross estate the value of an annuity or other payment (other than a lump sum distribution) receivable by any beneficiary (other than the executor) under--

(1) An employees' trust (or under a contract purchased by an employees' trust) forming part of a pension, stock bonus, or profit-sharing plan which, at the time of the decedent's separation from employment (whether by death or otherwise), or at the time of termination of the plan if earlier, met the requirements of section 401(a) . . .

Section 2039(c) further provides that if the amounts payable after the death of the decedent are attributable to any extent to contributions made by the decedent, no exclusion is allowable for that part of the value of such amounts in the proportion that the total contributions made by the decedent bear to the total contributions.

Thus, the includible amount of any benefit payable to a beneficiary, other than the decedent's estate, under a qualified employees' plan is limited to that portion of the benefit that is attributable to the decedent's contribution.

The specific question presented is whether any portion of the survivor annuity payable to the decedent's spouse under the qualified plan is attributable to contributions made by the decedent to the plan and, therefore, includible in the decedent's estate.

The apportionment formula of section 2039(c) providing for inclusion of a portion of the benefits receivable under a qualified plan is only applicable in a situation where the decedent's beneficiary receives payments that are attributable to the contributions of both employer and employee. See, for example, Commissioner v. Estate of Raymond W. Albright, 316 F.2d 319 (2nd Cir. 1966). Where the contributions of the employer and employee are continuously treated as two separate and distinct accounts, one comprised solely of employer contributions and increments and the other comprised solely of employee contributions and increments, the amount of survivor benefits allocated from employer contributions is precisely determinable without reference to the apportionment formula. See, for example, Rev. Rul. 68-556, 1968-2 C.B. 408. Therefore, payments of a survivor's annuity that are solely attributable to the segregated and separately maintained fund of employer contributions to a qualified plan are excluded from the gross estate under section 2039(c) since none of the survivor benefits are attributable to contributions of the decedent.

In the present situation, the survivor's annuity payable to the decedent's spouse is solely attributable to the separately maintained and segregated contributions of the employer and, therefore, is within the exclusion provided by section 2039(c) of the Code. Accordingly, where both employer and employee contribute to a qualified pension plan with separately maintained and segregated contribution accounts and the decedent elected a refund of the decedent's contributions and increments thereon at retirement, the reduced survivor annuity payable solely from segregated employer contributions is excluded from the decedent's gross estate under section 2039(c) of the Code.