Rev. Rul. 82-199

ISSUE

For purposes of sections 2039(c) and 2042 of the Internal Revenue Code, is a lump sum pre-retirement death benefit consisting of life insurance proceeds paid to decedent's beneficiary under a qualified pension plan includible in decedent's gross estate?

FACTS

Situation 1. D, an employee of X Corporation, commenced participation in Xs noncontributory qualified plan described in section 401(a) of the Code in 1974 and remained an active participant in the plan until death in 1981. The plan provided a pre-retirement death benefit equal to the face amount of life insurance contracts on each participant's life purchased by the trustee of the qualified plan. D designated B as beneficiary of this death benefit.

The trustee of the qualified plan applied a portion of the employer's contribution during each year D participated in the plan toward premiums on an ordinary life insurance policy under which D was the insured. The policy had a face value of 3840x dollars.

D died while employed by X. The life insurance proceeds were paid to B in a single lump sum in the year of D's death. The aggregate cost of the life insurance protection attributable to the contract that had been included in D's gross income in the taxable years before D's death was 300x dollars.

At the time of D's death, the policy had a cash surrender value of 840x dollars. Because the policy had a substantial cash value, a portion of the proceeds were subject to income tax under section 1.72-16 of the Income Tax Regulations. B elected 10-year income averaging with respect to the taxable portion of the distribution pursuant to section 402(e) of the Code and on the 1981 income tax return reported 37x dollars as the amount of the tax attributable to the distribution.

Situation 2. 'Me facts are the same as in Situation 1 except that instead of purchasing an ordinary life insurance policy, the trustee had purchased a level premium term policy with a face value of 4050x dollars for D with part of the employer contributions. The policy had no cash surrender value. Therefore, B reported none of the insurance proceeds as income in 1981.

LAW AND ANALYSIS

In the case of qualified plans described in section 401(a) of the Code (and certain other arrangements), section 2039(c) provides that the portion of the value of the annuity or other payment receivable by the beneficiary which is attributable to the employer's contributions is excludable from the decedent's gross estate even though those contributions were made on account of employment. Section 2039(c) as amended by the Revenue Act of 1978 (Pub. L. 95-600), 1978-3 C.B. 1 (Vol. 1), 30, effective in the case of decedents dying after December 31, 1978, and section 2039(f), added by Pub. L. 95-600, further provide that the exclusion is not applicable if the beneficiary receives a lump sum distribution under the plan and elects to treat any portion of that distribution as long-term capital gain under section 402(a)(2) of the Code or as ordinary income subject to the 10-year income averaging provisions of section 402(e) of the Code. See section 20.2039-4 of the Estate Tax Regulations pertaining to section 2039(f) of the Code.

Rev. Rul. 67-371, 1967-2 C.B. 329, considers a situation where the qualified plan benefit paid to a decedent's beneficiary consists of life insurance proceeds. The insurance proceeds would otherwise be includible in the decedent's gross estate under section 2042(2) since the decedent possessed an incident of ownership in the policy (e.g., the right to change the beneficiary designation.) However, the ruling holds that if section 2039(c) applies, it preempts any other provision of law. Therefore, insurance proceeds paid from the qualified plan were excludable from the decedent's gross estate under section 2039(c) as applicable to the facts in that revenue ruling. Further, the ruling concludes that even though the premium cost includible in the qualified plan participant's gross income is an employee contribution for purposes of section 72(f) of the Code, it is not treated as a payment or contribution made by the decedent for purposes of section 2039(c) of the Code.

HOLDING

Situation 1. Because B elected to report the taxable portion of the distribution as ordinary income subject to the special 10-year averaging, no portion of the life insurance proceeds payable under the qualified plan are excludable from the decedent's gross estate under section 2039(c) of the Code. Since section 2039(c) is not applicable, the full amount of the proceeds paid under the noncontributory qualified plan to B is includible in D's gross estate under section 2042 of the Code.

Alternatively, if B had determined that income averaging was not advantageous in light of the implications of section 2039 and had reported the taxable portion of the proceeds as ordinary income other than ordinary income subject to 10-year averaging, the full amount of the insurance proceeds would have been excludable from D's gross estate under section 2039(c) of the Code in accordance with Rev. Rul. 67-371.

Situation 2. Because the amount distributed to B represented the proceeds of a term insurance policy with no cash surrender value, the distribution was fully excludable from income under section 1.72-16 of the Income Tax Regulations. Thus, B had no reportable income as a result of the receipt of the life insurance proceeds. Consequently, there was no amount with respect to which B could be expected to elect not to treat as long-term capital gain or ordinary income subject to 10-year averaging. The distribution and the full amount of the life insurance proceeds payable under the noncontributory qualified plan is excludable from D's gross estate.

Section 245 of the Tax Equity and Fiscal Responsibility Act of 1982, pub. L. No. 97-248, 96 Stat. 324 (Sept. 3, 1982), page 462, 522, this Bulletin, limits the estate tax exclusion under section 2039(c) and (e) of the Code to 100,000 dollars in the case of estates of decedents dying after December 31, 1982. Therefore, if the decedent in the facts in preceding two paragraphs died in 1983 or later, the estate tax exclusion would be limited to 100,000 dollars.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 67-371 is amplified by this revenue ruling to reflect current law.