Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 55-64

1955-1 C.B. 228

Caution: Superseded by Rev. Rul. 71-146

IRS Headnote

Installment payments made to beneficiaries of deceased employee participants of a pension or profit-sharing plan qualified under section 165(a) of the Internal Revenue Code of 1939 are excludable from gross income of the beneficiary, in an aggregate amount not in excess of $5,000, when such payments are specifically designated as a death payment, paid only by reason of the death of the employee and represent amounts in which the participant had a forfeitable interest immediately prior to death. Where such installment payments represent an amount in which the participant had a nonforfeitable interest as well as an amount in which he had a forfeitable interest at the time of his death, the beneficiary may exclude from his gross income each year a pro rata portion of such payments, until an aggregate of $5,000 is excluded.

Full Text

Rev. Rul. 55-64

Advice has been requested whether all or a portion of installment payments made to beneficiaries of deceased employee participants of a pension or profit-sharing plan qualified under section 165(a) of the Internal Revenue Code of 1939 are excludable from gross income of the beneficiary under section 22(b)(1)(B) of the Code.

Section 22(b) of the Internal Revenue Code of 1939 provides in part as follows:

(b) EXCLUSIONS FROM GROSS INCOME.--The following items shall not be included in gross income and shall be exempt from taxation under this chapter [chapter 1 of the Code]:

(1) LIFE INSURANCE, ETC.--Amounts received--

*   *   *   *   *   *   *

(B) under a contract of an employer providing for the payment of such amounts to the beneficiaries of an employee, paid by reason of the death of the employee; whether in a single sum or otherwise * * * The aggregate of the amounts excludible under subparagraph (B) by all the beneficiaries of the employee under all such contracts of any one employer may not exceed $5,000.

Section 39.22(b)(1)-2 of Regulations 118, relating to death payments by an employer of amounts paid by reason of the death of an employee, provides in part, that the exclusion under section 22(b)(1)(B) of the Code does not apply to amounts with respect to which the deceased employee possessed, immediately prior to his death, a nonforfeitable right to receive the amounts while living.

Treatment of payments received attributable to a forfeitable interest and to payments received attributable to both a forfeitable and a nonforfeitable interest is best illustrated by the two following examples:

First, assume (1) the amount payable is $10,000, (2) the beneficiary elects to take payment in twenty-five monthly installments of $400, and (3) the employee's right, immediately prior to his death, to receive the amount while living was forfeitable. Under this assumption the employee would not have been entitled to any portion of the $10,000 upon termination of services other than by death. Under the regulations the $10,000 is a death payment, the excludable portion of which is limited by law to an amount not in excess of $5,000. In this case, the beneficiary may exclude from gross income the monthly payments received or made available under the plan, on account of the death of the employee, until such payments equal $5,000.

Secondly, assume that the total payment is $20,000 and the employee had a nonforfeitable interest, as explained above, of $14,000, and that $6,000 represented the forfeitable portion of the $20,000 payment which the beneficiary will receive at the rate of $2,000 per year for 10 years. Since the $20,000 payable in this example is comprised of both taxable and nontaxable income and the beneficiary elects to receive the aggregate over a period of years, it is deemed that the total amount received each year consists of nontaxable income (death benefit) and taxable income. Under these circumstances the beneficiary may exclude from his gross income each year, until $5,000 is excluded, that proportion of the total payments received in a taxable year which bears the same ratio to such total payments as the amount representing the forfeitable interest ($6,000) bears to the aggregate amount payable ($20,000) under the plan. The excess of the payments received each year over the amount excludable is taxable as provided under section 22(b)(2) of the Code. Using the amounts in the foregoing assumption, it will be noted that 6,000/20,000 or 3/10X$2,000, or $600, is excludable each year for 8 years, and that $200 of the $2,000 payment for the ninth year is excludable