Rev. Rul. 80-158

ISSUE

Does the exclusion allowable under section 2039(c) of the Internal Revenue Code apply to the decedent's interest in a "qualified" profit sharing plan, under the circumstances described below? FACTS

The decedent, prior to retirement, was an employee of X company and a participant in the company's non-contributory, profit-sharing plan that was qualified under section 401(a) of the Code. The plan provided for the purchase of ordinary paid up life insurance policies on the lives of all participating employees. If a participant terminated employment other than by death, the trustee of the plan was required at the request of the participant to convert the life insurance contracts of that participant into annuities payable for life with ten years certain or to surrender the contracts for their cash values and distribute the lump sum to the participant.

On the decedent's retirement date in 1975, two policies that had been purchased by the trustee of the plan on decedent's life were surrendered for two supplemental policies. Under the terms of the supplemental contracts, the decedent as primary payee was to receive monthly annuity payments for life with ten years of payments guaranteed in any event. In addition, although the supplemental policies were not distributed to the decedent, the decedent had the right to designate a contingent beneficiary as payee of any proceeds payable at death and had the right to surrender the supplemental contracts and receive the commuted value of the guaranteed payments. Upon the decedent's death in 1977, the remaining guaranteed installments under the supplemental contracts were paid to the designated contingent beneficiary.

LAW AND ANALYSIS

Section 2033 of the Code and the regulations thereunder provide that the gross estate of a decedent includes the value of all property beneficially owned by the decedent at the time of 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 decedent's employer. Section 2039(c), however, provides an exclusion from the gross estate for an annuity or other payment receivable by any beneficiary (other than the executor) under a profit-sharing plan which, at the time of the decedent's separation from employment, 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 value of such payments.

Section 20.2039-2(b), Example 4, of the Estate Tax Regulations indicates that if an employee is considered as having constructively received the amount credited to the employee's account under a qualified plan, such amount is not considered as receivable by the designated beneficiary under the plan and the exclusion under section 2039(c) of the Code is not applicable. See Northern Trust Co. v. United States, 389 F.2d 731 (7th Cir. 1968); First Trust Co. v. United States, 321 F. Supp. 1025 (D.C. Minn. 1970); Estate of Harold S. Brooks, 50 T.C. 585 (1968), acq., 1961-1 C.B. 20; Rev. Rul. 67-37, 1967-1 C.B. 271.

An amount that is otherwise excludable from the gross estate by virtue of section 2039(c) of the Code is nevertheless includible under section 2033, if the deceased constructively received all or a portion of the benefits under the plan. Under such circumstances, the amount receivable by the designated beneficiary is considered as passing from the deceased employee rather than under the plan. Constructive receipt, however, does not occur where the taxpayer's control of the benefits is subject to substantial limitations or restrictions not imposed by the taxpayer. See Rev. Rul. 77-34, 1977-1 C.B. 276.

In the present case, the decedent had the right during the ten year period of guaranteed payments to surrender the rights under the profit-sharing plan for the commuted value of the remaining guaranteed payments. If the decedent had exercised the right to receive the commuted value of the guaranteed payments, the decedent would have suffered a significant economic penalty, because the amount required to purchase a new annuity of comparable value would have been greater than the commuted value of the remainder of the ten year certain payments. See Rev. Rul. 68-482, 1968-2 C.B. 186. Thus, the decedent's control over the guaranteed payments was subject to a substantial limitation or restriction, and the decedent's interest in the profit-sharing trust was not constructively received by the decedent prior to death.

HOLDING

The designated beneficiary is considered to have received the remaining guaranteed payments from the noncontributory, qualified profit-sharing trust rather than from the decedent, and the value of these payments is excluded from the decedent's gross estate under section 2039(c) of the Code.