Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-71

1975-1 C.B. 309

IRS Headnote

Legatee's payments to third party beneficiaries. Payments by a sole legatee to her nieces and nephews, in accordance with an enforceable contract between the legatee and the nieces' and nephews' parents, of the amount of the legacy they would have received if their parents' bequest had not lapsed were taxable as gifts at the date of the testator's death.

Full Text

Rev. Rul. 75-71

Advice has been requested whether the payments by the taxpayer, the sole legatee under the will of her sister, X, to her nieces and nephews in accordance with a contractual arrangement with their parents are subject to the Federal gift tax under the circumstances described below.

X executed her will in 1963 naming her six sisters and brothers as beneficiaries of her residuary estate. The will provides that "if any of the beneficiaries named should predecease me his or her bequest shall lapse and his or her share of my estate shall be divided equally between the survivors."

In 1968 three of X's sisters, the only then surviving of the original six brothers and sisters, entered into an agreement whereby each contracted, in the event she survived X, to transfer to the children of any contracting party who failed to survive X, that portion of X's estate to which the deceased contracting party would have been entitled if all three contracting parties had survived X. X died in 1973, leaving the taxpayer as the sole surviving beneficiary. Thereafter, upon receipt of her inheritance, the taxpayer made distributions to her nieces and nephews pursuant to the terms of the agreement with their parents.

Under the applicable local law, the agreement between the expectant legatees for the benefit of the third party beneficiaries created a mutually binding contractual obligation at the time of its execution. However, because of the aleatory nature of the contract, it did not become enforceable until X died. That is, performance under the contract was dependent upon the uncertainty that any party would actually receive an inheritance under X's will since she could have revoked or amended the will or disposed of all her property before she died. Such uncertainty was removed only by her death.

Section 2511 of the Internal Revenue Code of 1954 provides that the gift tax applies to a transfer of property by gift "whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible * * *." Section 2512(b) of the Code provides that "where the property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift * * *."

Section 25.2511-1(c) of the Gift Tax Regulations provides that "all transactions whereby property or property rights or interests are gratuitously passed or conferred upon another, regardless of the means or device employed, constitute gifts subject to tax."

Section 25.2512-8 of the regulations states that "transfers reached by the gift tax are not confined to those only which, being without valuable consideration, accord with the common law concept of gifts, but embrace as well sales, exchanges, and other dispositions of property for a consideration to the extent that the value of the property transferred by the donor exceeds the value in money or money's worth of the consideration given therefor."

Rev. Rul. 69-347, 1969-1 C.B. 227, holds that the effective date of a gift for Federal gift tax purposes is the date upon which the taxpayer becomes legally obligated to perform according to the terms of a contract rather than the date upon which the actual transfer is made, provided the gift is susceptible of valuation at that time.

Although the local law treats the transfers in this case as performance of contractual obligations based on mutual promises of the contracting parties, the transfers are not deprived of their essential characteristics as gifts if the donor does not receive "adequate and full consideration in money or money's worth" in return for the transferred property. In this case the taxpayer received nothing more than the assurance that, if she should die before X and one or both of the other two expectant legatees should survive X, her children would receive one-third of the total inheritance from X. Such an assurance is not "adequate and full consideration in money or money's worth" since it does not offset the decrease in the value of the taxpayer's estate that was caused by the transfer of two-thirds of her inheritance. Commissioner v. Wemyss, 324 U.S. 303 (1945); Estate of John M. Goetchuis, 17 T.C. 495 (1951); Commissioner v. Bristol, 121 F. 2d 129 (1st Cir. 1941).

At the date of death of X the uncertainty that there would ever be a transfer of property pursuant to the contract between the prospective legatees was removed. It was at this time that the rights of the third party beneficiaries (the nieces and nephews) became enforceable against the taxpayer, thus allowing the value of the gift to be determined.

Accordingly, the payments that the taxpayer became obligated to make pursuant to the terms of the contract with the other prospective legatees were taxable as gifts at the date of X's death.