Rev. Rul. 80-81

ISSUES

1. Is the refund of a deceased employee's contribution to the United States Civil Service Retirement System, plus interest thereon, includible in the employee's gross estate under section 2039 of the Internal Revenue Code, if the refund is paid by the Civil Service Commission directly to the employee's former spouse pursuant to a divorce decree?

2. Is the amount of the refund payable to the former spouse deductible under section 2053(a)(4) of the Code, if the divorce court has the power to decree a settlement of all marital rights?

FACTS

In 1978, D and A entered into a written agreement in contemplation of their obtaining a divorce. The agreement provides that, upon D's retirement, A would receive one-half of the annuity payments that would otherwise be payable to D as a retired federal employee under the United States Civil Service Retirement System. The agreement also provides that, if D died prior to retirement, the lump-sum refund of D's contribution to the system plus interest accrued thereon would be payable to A.

In March 1979, D and A were divorced by a court in State X. The court incorporated the settlement agreement into the divorce decree. Under the laws of State X, a divorce court has the power to decree a settlement of all marital property rights.

D died in July 1979, prior to retirement.

LAW AND ANALYSIS

Section 2039(a) of the Code provides for the inclusion in the gross estate of 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, if, under such contract or agreement, the decedent possessed for life the right to receive such annuity or other payment either alone or in conjunction with another. Section 2039(b) provides that the amount includible is the portion of the annuity or other payment attributable to the decedent's contribution to the purchase price and that contributions made by the decedent's employer are considered to be contributed by the decedent. Section 2039(c) provides that contributions by an employer under an employee's trust meeting the requirements of section 401(a) are not considered as having been made by the decedent.

The United States Civil Service Retirement System is treated as an employee's trust which has been held to meet the requirements of section 401(a) of the Code. Rev. Rul. 56-1, 1956-1 C.B. 444, holds that if an individual who is covered by the Civil Service Retirement System dies before retirement, the amount includible in the gross estate under section 2039, because of the annuity payable to the surviving spouse or other beneficiary, is the amount of the decedent's contribution to the system plus the interest accrued thereon.

Section 2053(a)(4) of the Code allows a deduction for the amount of an unpaid mortgage or other indebtedness with respect to property, if the full value of the decedent's interest in the property is included in the gross estate without diminution by the amount of the mortgage or indebtedness.

In Rev. Rul. 76-113, 1976-1 C.B. 276, the decedent was divorced by a court with the power to decree a settlement of all marital property rights. Under the terms of the divorce decree, the decedent was required to maintain certain life insurance policies until death and to name the spouse as beneficiary of the policies. The ruling holds that since the insurance proceeds are includible in the decedent's gross estate under section 2042 of the Code, the obligation to pay the proceeds to the former spouse pursuant to the divorce decree is an indebtedness against property included in the value of the gross estate and is deductible under section 2053(a)(4).

Subsection (j) of 5 U.S.C. section 8345, added by Pub. L. No. 95-366, 92 Stat. 600 (1978), authorizes the Civil Service Commission to make payments, which would otherwise be payable to a retired federal employee, to another person if and to the extent expressly provided for in the terms of any court decree of, or any court order or court-approved property settlement incident to, divorce, annulment or legal separation. Section 8345(j)(3) defines a court as any court of any state or the District of Columbia.

In the present situation, the value of D's contribution to the Civil Service Retirement System plus interest accrued thereon is includible in D's gross estate under section 2039 of the Code because D, immediately before death, possessed the right to receive an annuity upon retirement. The refund of D's contribution plus interest is payable by the Civil Service Commission directly to the former spouse because of a divorce decree by a court having the power to decree a settlement of all marital property rights. Therefore, a deduction for the amount of the refund is allowable under section 2053(a)(4) of the Code.

HOLDINGS

1. The refund of D's contribution to the United States Civil Service Retirement System, plus the interest accrued thereon, is includible in the gross estate under section 2039 of the Code, even though the refund is paid to D's former spouse pursuant to the terms of a divorce decree.

2. Because the refund is payable to D's former spouse pursuant to a divorce decree issued by a court having the power to decree a settlement of all marital property rights, the amount of the refund is deductible under section 2053(a)(4) of the Code.