Rev. Rul. 79-190

ISSUE

Is the value of an annuity payable under an employee's retirement plan that is qualified under section 401(a) of the Internal Revenue Code of 1954, includible in the gross estate of a beneficiary of the plan under the circumstances described below, and if includible, to what extent do the exclusionary provisions of section 2039(c) apply?

FACTS

A, the spouse of D, was an employee of the M Company, and participated in the company's noncontributory employees' retirement plan. The plan was qualified under section 401(a) of the Code.

A retired from employment with M Company in 1975. At that time, A elected, in accordance with the options available under the plan, to receive the accrued benefit in the form of a joint and survivor annuity, with 180 monthly payments guaranteed. Under this option, the benefit would be payable to A for life, and upon A's death, to D for life. If D predeceased A, and A subsequently died within 180 months after payments from the plan commenced, then the remaining guaranteed payments would be paid to the beneficiary selected by A. Similarly, if D survived A, and subsequently died within 180 months after the payment of benefits under the plan commenced, then the remaining guaranteed payments would be paid to the beneficiary selected by D. D could select any beneficiary, including D's estate, and D could change the beneficiary designation at any time prior to D's death. If D failed to designate a beneficiary, the benefit would be payable to D's executor.

A died in 1977, survived by D. After A's death D began receiving the survivor's annuity, in accordance with the terms of the retirement plan. D designated C, D's child, as the beneficiary of any guaranteed payments remaining at D's death. D died in 1979. At this time, 50 of the 180 payments guaranteed under the plan had been paid. The plan trustee commenced payment of the remaining 130 payments to C in accordance with D's designation. At the time of D's death, these remaining 130 payments had a present value of 100x dollars, determined in accordance with section 20.2031-1 of the Estate Tax Regulations.

The question presented is whether the value of the benefit payable to C is includible in D's gross estate, and if so, whether any amount may be excluded under section 2039(c) of the Code.

LAW AND ANALYSIS

Section 2039(a) and (b) of the Code includes in the decedent's gross estate 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 purchase price of the annuity is attributable to contributions made by the decedent. Section 2039(a) and (b) are not intended to be exclusive. Thus, an annuity that can not be included under section 2039(a) and (b) may still be subject to inclusion under another Code section. See section 20.2039-1(a) of the Estate Tax Regulations.

Section 2039(c) of the Code, as amended by the Revenue Act of 1978, Pub. L. No. 95-600, 95th Cong., 2d Sess. (November 6, 1978), effective in the case of decedent's dying after December 31, 1978, 1978-3 C.B. (Vol. 1) 1, 30, provides for the exclusion of certain employee death benefits, as follows:

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 an amount described in subsection (f)) receivable by any beneficiary (other than an 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 the proportionate part of such payments. The section specifically provides that contributions made by the decedent's employer under a plan qualified under section 401(a), are not considered to be contributions of the decedent.

In Estate of Kleemeier v. Commissioner, 58 T.C. 241 (1972), the court concluded that the provisions of section 2039(c) that operate to exclude certain "survivor" benefits, are available only to the estate of a decedent who was an employee covered by the retirement plan under which the benefit is paid. In Kleemeier, the decedent's spouse participated in an employee retirement program. After the spouse's death, the decedent received a survivorship annuity, and under the terms of the plan, any additional payments due at the death of the decedent were payable to the decedent's designated beneficiary. The decedent's estate argued that any amounts otherwise includible in the gross estate were excludible under section 2039(c)(3) of the Code, since no portion of the annuity was attributable to the decedent's contributions to the plan. The court, however, determined that the language of section 2039(c) requires that in order for the provisions of the section to apply, the decedent must be the employee who accrued the benefit under the plan. See also, Rev. Rul. 67-278, 1967-2 C.B. 323, which applied this principle prior to the enactment of section 2039(d) to a decedent's community property interest in her spouse's retirement benefits.

Section 2041(a)(2) of the Code includes in the gross estate all property over which the decedent at the time of death possesses a general power of appointment, or with respect to which the decedent has exercised a general power of appointment and the exercise is such that if it were a transfer of property owned by the decedent the property would be includible in the decedent's gross estate under sections 2035 to 2038 inclusive. Section 20.2041-1(b)(1) of the regulations provides that the term "power of appointment" includes all powers which are in substance and effect powers of appointment regardless of the nomenclature used. Section 20. 2041-1(c)(1) defines a "general power of appointment" as any power of appointment exercisable in favor of the decedent, the decedent's estate, or the creditors of either.

In the instant case, D possessed the unrestricted power to designate the beneficiary of any guaranteed payments remaining payable at D's death. Under these circumstances, D's power to designate the beneficiary is a general power of appointment in accordance with section 2041 of the Code, and the applicable regulations. See for example, Estate of Charles Wolf v. Commissioner, 29 T.C. 441 (1957), modified on another issue, 264 F. 2d 82 (3rd Cir. 1959), in which the court found a survivor benefit includible in the decedent-employee's gross estate under section 811(f)(2) of the Internal Revenue Code of 1939 [current version section 2041(a)(2) of the Code].

Accordingly, the present value of the remaining 130 guaranteed payments is includible in D's gross estate under section 2041(a)(2) of the Code. The fact that the annuity may not be includible under section 2039(a) and (b) does not preclude inclusion of the value of the annuity under any other Code section. See section 20. 2039-1(a) of the regulations, and Estate of Kleemeier, cited above, at 251.

Further, in accordance with the court's decision in Kleemeier, since D was not the plan participant who accrued the benefit, the exclusion provisions of section 2039(c) are not available to D's estate.

HOLDING

1) 100x dollars, representing the present value of the 130 guaranteed payments is includible in D's gross estate under section 2041(a)(2) of the Code.

2) The exclusion provisions of section 2039(c) are not available to D's estate.