Rev. Rul. 69-284

Advice has been requested whether, under the circumstances described below, the adjustment to taxable income to arrive at "adjusted taxable income" for income averaging purposes in connection with a bequest is limited to six percent of the fair market value of such interest.

The taxpayer received a partnership interest pursuant to a bequest contained in the will of his mother. He elected the benefits of income averaging provided by section 1302 of the Internal Revenue Code of 1954 and reduced his taxable income by six percent of the fair market value of the inherited partnership interest rather than by the actual known income from the interest which was substantially in excess of the six percent amount.

The issue is whether the taxpayer in electing income averaging must reduce his taxable income, in arriving at "adjusted taxable income," by the actual income received from interests in property acquired by bequest, if known, or whether the taxpayer may choose to reduce taxable income by six percent of the fair market value of the inherited interest.

Section 1302(b)(2)(B) of the Code provides, in part, that unless the taxpayer otherwise establishes to the satisfaction of the Secretary or his delegate, the amount of net income for any taxable year attributable to an interest received as a gift, bequest, devise, or inheritance during the computation year or any base period year shall be deemed to be six percent of the fair market value of such interest.

Section 1.1302-2(c)(3)(ii)(b) of the Income Tax Regulations provides, in part, that with respect to any computation year, the amount of net income attributable to each interest in property must be determined in the same manner for each of the five taxable years taken into account under the income averaging provisions. Thus, unless the taxpayer establishes the actual income attributable to an interest in property to the satisfaction of the District Director for each of such five years, the amount of net income attributable to each such interest for each such five years is deemed to be six percent of the fair market value of such interest.

Under the provisions of section 1302(b)(2)(B) of the Code the taxpayer may (but is not required to) establish the amount of net income attributable to an interest received as a bequest. Otherwise, the amount of net income is deemed to be six percent of the fair market value of the interest.

Accordingly, in the instant case, the taxpayer may use six percent of the fair market value of the interest received as a bequest in lieu of the actual income in arriving at "adjusted taxable income" provided he uses the six percent method for both the computation year and the base period years.