Internal Revenue Service
Revenue Ruling
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smRev. Rul. 60-18
1960-1 C.B. 145
Sec. 301
Sec. 302
Sec. 316
Sec. 318
IRS Headnote
For the purposes of section 318(a)(2)(A) of the Internal Revenue Code of 1954, a residuary legatee does not cease to have an interest as a beneficiary of an estate in the process of administration until the estate is finally closed, even though the estate has known assets only sufficient to pay its existing liabilities. Therefore, in such a case, the distribution in redemption of all the stock held by the estate in a corporation is held to be a distribution essentially equivalent to a dividend inasmuch as the residuary beneficiary of the estate owned, actually and constructively, all of the remaining stock of the corporation. Section 1.318-3(a) of the Income Tax Regulations is applicable only in the case of specific legatees of an estate.
Full Text
Rev. Rul. 60-18
Advice has been requested whether, for purposes of determining stock ownership under the provisions of section 318 of the Internal Revenue Code of 1954, stock held by the residuary legatee of an estate which is in the process of administration and which has remaining known assets sufficient only to cover liabilities, will be attributable to the estate in determining the income tax consequences of a stock redemption.
B, an individual, died in 1954. His estate included 755 shares of a corporation's outstanding 757 shares of common stock, valued at 13 x dollars per share, with value was determined to be the fair market value of the stock on the date of his death. In 1957, the estate sold 89 shares of such stock to the corporation at 13 x dollars per share. This sale was properly treated by the executor as a distribution in full payment of the stock under the special rules of section 303 of the Code, relating to stock redemptions to pay death taxes and certain other expenses.
Also in 1957, ten shares of the stock were transferred to each of the decedent's three children in accordance with specific bequests in the will. All property remaining in the estate was bequeathed under the will to a residuary trust, the net income to be paid to the decedent's widow for life and the remainder to pass to the children. During the widow's life estate the principal of the trust could be used for her benefit if necessary. Late in 1957, 488 shares of the stock were transferred to the residuary trust. At the end of the year 1957, the stock was held as follows:
The decedent's first son ___________________ 11 shares
The decedent's second son __________________ 10 shares
The decedent's daughter ____________________ 10 shares
The decedent's widow _______________________ 1 share
Residuary trust ____________________________ 488 shares
Estate of B ________________________________ 148 shares
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Total __________________________________ 668 shares
In 1958, the corporation also redeemed the 148 shares held by the estate for 13 x dollars per share. This was done in order to secure funds to satisfy existing indebtedness of the estate. After the redemption, the value of the estate's remaining assets, including the redemption proceeds, was only equal to the total of its liabilities.
The treatment of distributions in redemption of stock is governed by the provisions of section 302 of the Code. In determining the ownership of stock for purposes of section 302 of the Code, the provisions of section 318 of the Code apply. The question involved is whether the stock owned by the residuary trust and its beneficiaries is attributed to the estate under that section.
Section 318(a)(2)(A) of the Code provides, in part, that stock owned, directly or indirectly, by or for a beneficiary of an estate shall be considered as being owned by the estate.
Section 318(a)(2)(B) of the Code provides, in part, that stock owned, directly or indirectly, by or for a beneficiary of a trust shall be considered as being owned by the trust, unless such beneficiary's interest in the trust is a remote contingent interest.
The statute does not define the term `beneficiary.' However, section 1.318-3(a) of the Income Tax Regulations, relating to estates and trusts, provides, in part, that a person shall no longer be considered a beneficiary of an estate when all the property to which he is entitled has been received by him, when he no longer has a claim against the estate arising out of having been a beneficiary, and when there is only a remote possibility that it will be necessary for the estate to seek the return of property or to seek payment from him by contribution or otherwise to satisfy claims against the estate or to pay expenses of administration. When, pursuant to the preceding sentence, a person has ceased to be a beneficiary, stock owned by him shall not be considered owned by the estate and stock owned by the estate shall not be considered owned by him.
Thus, under the regulations, the interest of a specific legatee of an estate may terminate before the estate is closed. However, this is not so as to the interest of a residuary legatee. A residuary legatee has no claim, as such, against the estate. He is entitled merely to all the remaining assets in the estate after the payment of debts, estate and inheritance taxes, administration expenses, and specific legacies and devices. The interest of the residuary legatee in the estate does not cease until the estate has been closed, for until such time any assets or receivables of the decedent which are recovered would belong to him, assuming all prior claims were satisfied. Therefore, it may not be properly said of the residuary legatee, as it can of the specific legatee, that for all practical purposes he ceases to have any interest in the estate when all its assets have been distributed to him. Until the estate is actually closed, the residuary legatee's interest therein remains unchanged. It is therefore clear that the above-mentioned language of section 1.318-3(a) of the regulations does not apply to a residuary legatee.
Accordingly, in the instant case, except to the extent that any portion of the distribution qualifies under section 303 of the Code as a redemption of stock to pay death taxes, etc., the distribution in redemption of the 148 shares of stock from the estate of B constitutes a distribution essentially equivalent to a dividend, since under section 318(a)(2)(A) and (B) of the Code, stock held directly or indirectly by the residuary beneficiary is attributed to the estate. Hence, under section 302(d) of the Code, the redemption is treated as a distribution to which section 301 of the Code applies. Such distribution is taxable to the estate as a dividend to the extent of the earnings and profits of the corporation as provided in sections 301 and 316 of the Code.