Internal Revenue Service
Revenue Ruling
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smRev. Rul. 63-52
1963-1 C.B. 173
IRS Headnote
Where the decedent owned policies of insurance on the life of another person and the gross estate is valued under the provisions of section 2032 of the Internal Revenue Code of 1954, the appreciation in value of the policies caused by the death of the insured during the alternate valuation period is not property earned or accrued during that period and, therefore, is not `excluded property' within the meaning of section 20.2032-1(d) of the Estate Tax Regulations. It is `included property' within the meaning of that section and, accordingly, the entire value of the proceeds of the policies is includible in the gross estate.
Full Text
Rev. Rul. 63-52
Advice has been requested whether the increase in the value of certain life insurance policies, by reason of the death of the insured during the alternate valuation period, would constitute `included property' for purposes of valuing the gross estate of the deceased beneficiary under the alternate valuation provisions of section 2032 of the Internal Revenue Code of 1954.
Among the assets of a decedent, at the time of his death, were several insurance policies on the life of another person. The decedent was the owner and beneficiary of these policies. Within one year after the decedent's death, the insured also died. The estate of the decedent, to which his interest in these policies had passed, became entitled to and thereafter collected the death proceeds of the policies. The value of the policies following the death of the insured substantially exceeded their value at the date of the decedent's death.
Section 2032 of the Code provides, in general, for the valuation of a decedent's gross estate at an alternate date other than the date of the decedent's death and, in subsection (a), provides that where the executor elects to value the estate under that section, the value of the gross estate shall be determined by valuing all property in the gross estate as follows:
(1) In the case of property distributed, sold, exchanged, or otherwise disposed of, within 1 year after the decedent's death such property shall be valued as of the date of distribution, sale, exchange, or other disposition.
(2) In the case of property not distributed, sold, exchanged, or otherwise disposed of, within 1 year after the decedent's death such property shall be valued as of the date 1 year after the decedent's death.
(3) Any interest or estate which is affected by mere lapse of time shall be included at its value as of the time of death (instead of the later date) with adjustment for any difference in its value as of the later date not due to mere lapse of time.
Section 20.2032-1(d) of the Estate Tax Regulations provides that all property interests existing at the date of a decedent's death which form a part of his gross estate are `included property' for the purpose of valuing the gross estate under the alternate valuation method. Such property remains `included property' for the purpose of valuing the gross estate even though the property interests change in form during the alternate valuation period by being actually received, or disposed of, in whole or in part, by the estate. On the other hand, the regulations provide that property earned or accrued (whether received or not) after the date of the decedent's death and during the alternate valuation period with respect to any property interest existing at the date of the decedent's death , which does not represent a form of `included property' itself or the receipt of `included property,' is excluded in valuing the gross estate under the alternate valuation method.
In Herbert H. Maass v. Higgins , 312 U.S. 443 (1941), Ct. D. 1494, C.B. 1941-1, 434, the Supreme Court of the United States held that ordinary rents, dividends, and interest received during the year following the decedent's death are not to be included in the value of the gross estate, if such estate is valued under the optional (alternate) valuation provisions of section 302(j) of the Revenue Act of 1926, as amended (corresponding to section 2032(a) of the 1954 Code). The Court stated as follows:
It is not denied that, in common understanding, rents, interest, and dividends are income. Under the Revenue Acts, if such items are collected by a decedent's estate, the executors are bound to return them and pay tax upon them as income.
The decision of the Supreme Court as to rents, dividends, and interest, however, does not preclude the inclusion in the gross estate of the appreciation in the value of an insurance policy resulting from the death of the insured within the alternate valuation period.
In the instant case, the death of the insured was the precise event which caused the increase in the value of the insurance policies as of the alternate valuation date. The increase in value occasioned by the death of the insured was not due to `mere lapse of time,' within the meaning of section 2032(a)(3) of the Code. See Estate of John A. Hance v. Commissioner , 18 T.C. 499 (1952), acquiescence, C.B. 1953-1, 4. The increase in value of the policies cannot, therefore, be attributed to a `mere lapse of time.'
An insurance policy is not, in common understanding, income producing property, and the appreciation in value of an insurance policy by reason of the death of the insured is not income in the statutory sense. Accordingly, the appreciation in value of the life insurance policies in the instant case, which occurred when the insured died is not `property earned or accrued' as in the case of ordinary interest, rents and dividends. Rather, the termination of the insurance contracts, brought about by the death of the insured, constitutes a disposition of the property interest in the contracts, within the meaning of section 2032(a)(1) of the Code.
The increase in value of the insurance contracts is, therefore, `included property,' for purposes of valuing the gross estate under the alternate valuation method.
This interpretation is supported by H.R. Report No. 1885, on the Revenue Act of 1935, 74th Cong., 1st Sess., C.B. 1939-1 (Part 2), 660, at 664, which gives an example showing how the calculation of the value of property included in the gross estate should be made during the one-year period following the decedent's death. In this example, the appreciation and depreciation in the value of stocks and bonds and other assets, occurring during the year after death, are shown in the values of those assets as of one year after the date of the decedent's death or as of the date of sale, distribution, or other disposition of such assets (maturity in the case of foreign bonds). This example negatives a construction that the appreciation in value of the insurance policies, resulting from the death of the insured during the alternate valuation period, was `property earned or accrued' within the meaning of the Estate Tax Regulations.
Accordingly, it is held that for Federal estate tax purposes, the appreciation in value of the life insurance policies which matured by reason of the death of the insured during the alternate valuation period is not property earned or accrued. Therefore, no part of the proceeds of the insurance is excluded property, but is `included property,' within the meaning of the Estate Tax Regulations, so that the entire value of the proceeds of the policies is includible in the gross estate.
Compare Revenue Ruling 55-379, C.B. 1959-1, 449, which holds that the increase in value of a policy of insurance, such as one owned by a decedent who was not the insured, which increase is attributable to the payment of premiums, or any interest earned, during the year following date of death, is deemed to be `excluded property.' Note, however, that that ruling involved the valuation of a policy in the estate of a person other than the insured where the policy did not mature during the alternate valuation period by reason of the death of the insured.