Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 76-68

1976-1 C.B. 216

Section 1014

IRS Headnote

Community property U.S. Treasury Bonds; surviving spouse basis. The surviving spouse's basis for community property U.S. Treasury bonds, redeemable at par in payment of Federal estate tax, is the fair market value at the date of the other spouse's death rather than their value for Federal estate tax purposes.

Full Text

Rev. Rul. 76-68

Advice has been requested whether, under the circumstances described below, the basis under section 1014 of the Internal Revenue Code of 1954 of certain United States Treasury bonds is the par value or the fair market value of the bonds on the date of the decedent's death.

A and B were married to each other and held United States Treasury bonds as community property in a community property state. These bonds were issues eligible for redemption at par value and accrued interest upon the death of the owner for the purpose of having the proceeds applied in payment of the Federal estate tax on the deceased owner's estate. Such bonds are commonly referred to as "flower bonds."

A died on July 1, 1975. For purposes of section 2033 of the Code, A had an interest in one-half of each bond held as community property and therefore one-half the value of all the community bonds are includible in the gross estate of A. In order to make the determination of the value of the decedent's one-half interest in the community bonds, it is necessary to list the total value of the community bonds on Schedule B of the Federal estate tax return. One-half of this value is then included in A's gross estate.

For Federal estate tax purposes, the decedent's gross estate includes the par value of any bonds that were or could be redeemed at par in payment of the Federal estate tax. Bankers Trust Company v. United States, 284 F. 2d 537 (1960), and Rev. Rul. 69-489, 1969-2 C.B. 172. Since, in a community property state, A is deemed to be the owner of only one-half of each bond, only bonds that represented in value one-half of the value of all the community bonds were eligible for redemption at par to pay the Federal estate tax of A. See General Regulations Governing United States Securities, 31 CFR 306.28 (1973). To this extent, bonds were redeemed by A's estate to pay A's Federal estate tax. Thus, on Schedule B of the Federal estate tax return the par value of all community bonds are listed so that when one-half of the total par value of community bonds is taken for inclusion in A's gross estate, such figure will reflect the required par value for bonds representing A's one-half interest which could be and were redeemed.

Bonds that represented in value B's one-half interest in the community bonds were distributed to B, and the question is raised as to what the basis of these bonds is in the hands of B.

Under the provisions of section 1014(a) of the Code the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passes from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent's death by such person, be the fair market value of the property at the date of the decedent's death.

Section 1014(b) of the Code provides that for purposes of subsection (a) certain enumerated property shall be considered to have been acquired from or to have passed from the decedent. Under section 1014(b)(6), such enumerated property includes property that represents the surviving spouse's one-half share of community property held by the decedent and the surviving spouse under the community property laws of any state of the United States, if at least one-half of the whole of the community interest in such property is includible in determining the value of the decedent's gross estate.

Section 1.1014-1(a) of the Income Tax Regulations provides, in part, that the purpose of section 1014 of the Code is, in general, to provide a basis for property acquired from a decedent that is equal to the value placed upon such property for purposes of the Federal estate tax. Accordingly, the general rule is that the basis of property acquired from a decedent is the fair market value of such property at the date of the decedent's death.

Section 1.1014-3(a) of the regulations provides in part that the value of property as of the date of the decedent's death, as appraised, for the purpose of the Federal estate tax shall be deemed to be its fair market value.

Although Schedule B of A's Federal Estate tax return reflects a par value for all the community bonds including those distributed to B, this value is listed merely as a means of computing the value of A's one-half interest in all community bonds, which value was then included in A's gross estate.

Therefore, the above language of the regulations that equates fair market value with the value of property as appraised for the purpose of the Federal estate tax has no application where the subject property is not included in a decedent's gross estate, and thus is not subject to the Federal estate tax.

The court in Bankers Trust Company stated that an important element of value of property is the use to which it may be put. Thus, the court arrived at a par value for bonds that could be used to pay estate taxes and a fair market value for bonds that could not be so used. Those bonds representing in value B's interest in total community bonds could not be redeemed at par until B's death. Therefore, such bonds do not have a par value at the date of A's death.

Accordingly, the basis to the surviving spouse, B, under sections 1014(a) and 1014(b)(6) of the Code, of the United States Treasury bonds described herein is the fair market value of those bonds as of the date of the decedent's death.