Internal Revenue Service
Revenue Ruling
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smRev. Rul. 72-62
1972-1 C.B. 311
Caution:Obsoleted by Rev. Rul. 93-29
IRS Headnote
The election of a survivor annuity under the Civil Service Retirement System by a retiring Federal employee is a transfer for which the marital deduction is not allowable.
Full Text
Rev. Rul. 72-62
Advice has been requested whether the Federal gift tax marital deduction is allowable in the circumstances described below.
The donor, a Federal employee, retired in 1970. In accordance with the provisions of the Civil Service Retirement System, he elected to receive a reduced retirement annuity in order to provide an annuity for his wife for such time as she might survive him. He also executed Standard Form 2808, Designation of Beneficiary, designating that any lump-sum benefit which might become payable after his death should be paid to his wife or to her estate.
A Federal employee makes a transfer subject to the Federal gift tax at the time when the Civil Service Commission approves his request for retirement and the election to provide a survivor annuity for his spouse. Rev. Rul. 70-514, C.B. 1970-2, 198.
Section 2523(a) of the Code provides that, in determining the amount of taxable gifts for a calendar quarter, a marital deduction shall be allowed in an amount equal to one-half the value of any interest in property transferred by gift during the calendar quarter to a donee who at the time of the gift was the donor's spouse. Section 2523(b) of the Code provides, however, that the marital deduction is not allowable with respect to a terminable interest in property if the donor immediately after the transfer has a power to appoint an interest in the property which he may exercise in such a manner that any person other than the donee spouse may possess or enjoy any part of the property after the termination or failure of the interest transferred to the donee spouse. A "terminable interest" in property is an interest that will terminate or fail on the lapse of time or on the occurrence or nonoccurrence of some contingency or event. Section 25.2523(b)-1(a)(3) of the Gift Tax Regulations. In this case, the donee spouse's interest is terminable in that her right to receive an annuity will cease at her death. At that time, any unrecovered contributions of the donor employee will be distributed to the beneficiary designated by him.
The Civil Service Regulations with respect to the designation by an employee or former employee of a beneficiary of any lump-sum payments provide that a change of beneficiary may be made at any time and without the knowledge or consent of the previous beneficiary. This right cannot be waived or restricted. 5 CFR 831.1003(e).
Where a retired Federal employee designates that any unrecovered contributions shall be paid to his surviving spouse or her estate at her death or remarriage, the marital deduction is allowable for Federal estate tax purposes. Rev. Rul. 64-310, C.B. 1964-2, 342. In such a case, no other person may possess or enjoy an interest in the property at the termination of the surviving spouse's interest since, at the retired employee's death, the designation of the recipient of lump-sum payments became irrevocable.
At the time of the donor's gift to his spouse (the date of approval by the Civil Service Commission), however, the donor retained, and could not waive, the right to change the beneficiary of any lump-sum payments made under the retirement system. It was therefore possible, after the transfer, for the donor to designate that someone other than the donee spouse or her estate should possess or enjoy an interest in the transferred property after the termination of the donee spouse's interest.
Accordingly, it is held that the Federal gift tax marital deduction is not allowable with respect to the gift by the retiring Federal employee of a survivor annuity for his wife under the Civil Service Retirement System.