Rev. Rul. 66-207

Advice has been requested whether a decedent's estate will realize taxable gain when a final distribution of appreciated property is made to satisfy a pecuniary legacy, but is of an insufficient amount to completely satisfy such a bequest.

By the terms of the decedent's will he made a bequest of a specific sum of money in the amount of 250 x dollars to be used to create a trust for the benefit of a designated beneficiary. After payment of all debts, costs of administration, claims, and specific bequests, other than the sum of 250 x dollars, the executor finds that all he has left in the estate are assets now having a fair market value of 200 x dollars and an aggregate basis to the estate of 150 x dollars. Included among these assets is cash in the amount of 10 x dollars. All of these assets will be transferred in trust to the designated trustee in accordance with the terms of the will.

Section 663 of the Internal Revenue Code of 1954 provides that there shall not be included as amounts falling within section 661(a) or 662(a) of the Code any amount which, under the terms of the governing instrument, is properly paid or credited as a gift or bequest of a specific sum of money or of specific property and which is paid or credited all at once or in not more than three installments.

Under section 1.663(a)-1(b)(1) of the Income Tax Regulations, in order to qualify as a bequest of a specific sum of money, the amount of money must be ascertainable under the terms of the testator's will as of the date of his death. The bequest of 250 x dollars is a `bequest of a specific sum of money' as that term is defined in section 1.663(a)-1(b)(1) of the regulations. The fact that the fair market value of the property remaining in the estate is not equal in amount to the bequest of the specific sum of money does not transform that bequest into a bequest of the residue of the estate. That circumstance merely means that the bequest of a specific sum has been abated in the amount of 50 x dollars and thereby reduced from 250 x dollars to 200 x dollars.

Section 1.661(a)-2(f) of the regulations provides, in part, that no gain or loss is realized by the trust or estate by reason of the distribution of property in kind unless the distribution is in satisfaction of a right to receive a distribution in a specific dollar amount. Under this provision of the regulations whenever property other than money is distributed by an estate to any beneficiary, including a trust, in satisfaction of a cash bequest the estate realizes gain or loss measured by the difference between the amount of the bequest satisfied and the basis to the estate of the property so distributed. See William R. Kenan, Jr., et al. v. Commissioner , 114 F.2d 217 (1940); and Sarah P. Suisman v. Eaton , 15 F.Supp. 113 (1935), affirmed per curiam, 83 F.2d 1019, certiorari denied, 299 U.S. 573.

When the executor of this estate distributes the property remaining in the estate to the designated trustee in creation of the trust the estate will realize a gain of 50 x dollars. This is the difference between the amount of the bequest satisfied by distribution of property other than cash (200 x dollars less 10 x dollars cash, or 190 x dollars) and the basis (150 x dollars less 10 x dollars cash or 140 x dollars) to the estate of the assets other than cash distributed in satisfaction of the bequest of a specific sum of money. The effect of the distribution will be the same as if the executor sold the remaining assets of the estate and distributed the proceeds to the trustee in trust.

No amount is deductible by the estate under section 661 of the Code or includible in gross income of the trust under section 662 of the Code since the distribution will be in satisfaction of a bequest of a specific sum of money, as defined by section 1.663(a)-1(b) of the regulations.

Accordingly, a final distribution by the executor of an estate of appreciated property, in order to satisfy a pecuniary legacy, will result in a gain to the estate, although such distribution is of insufficient amount to completely satisfy such bequest.