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 Rev. Rul. 78-14

1978-1 C.B. 281

IRS Headnote

Escheat of veteran's funds to U.S. The value of a deceased veteran's funds derived from benefits payable under laws administered by the Veterans' Administration that escheat to the U.S. for lack of heirs pursuant to 38 U.S.C. section 3202(e) is includible in the decedent's gross estate under section 2033 of the Code and is allowable as a deduction under section 2053.

Full Text

Rev. Rul. 78-14

Advice has been requested as to the estate tax consequences of the transfer of funds, derived from benefits payable under laws administered by the Veterans' Administration, to the United States pursuant to the Veterans' Benefits Act, Title 38 U.S.C. section 3202(e) (Supp. IV, 1974).

The decedent died intestate in 1975 in a Veterans' Administration hospital. The decedent had no legal heirs and the decedent's funds were left in the hands of a fiduciary. Pursuant to the provisions of 38 U.S.C. section 3202(e), these funds are to be returned to the Veterans' Administration to be deposited to the credit of the applicable appropriation.

Title 38 U.S.C. section 3202(e) provides as follows:

Any funds in the hands of a fiduciary appointed by a State court or the Veterans' Administration derived from benefits payable under laws administered by the Veterans' Administration, which under the law of the State wherein the beneficiary had his last legal residence would escheat to the State, shall escheat to the United States and shall be returned by such fiduciary, or by the personal representative of the deceased beneficiary, less legal expenses of any administration necessary to determine that an escheat is in order, to the Veterans' Administration, and shall be deposited to the credit of the applicable revolving fund, trust fund, or appropriation.

Section 2033 of the Internal Revenue Code of 1954 provides that the value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of death. Section 20.2033-1(a) of the Estate Tax Regulations requires that the gross estate includes all property beneficially owned by the decedent at the time of death.

Section 2053 of the Code allows a deduction from the value of a decedent's gross estate for claims against the decedent's estate that are allowable by the laws of the jurisdiction under which the estate is being administered.

Section 20.2053-4 of the regulations provides:

The amounts that may be deducted as claim against a decedent's estate are such only as represent personal obligations of the decedent existing at the time of his death, whether or not then matured. . . . Only claims enforceable against the decedent's estate may be deducted. Except as otherwise provided in section 20.2053-5 with respect to pledges or subscriptions, section 2053(c)(1)(A) provides that the allowance of a deduction for a claim founded upon a promise or agreement is limited to the extent that the liability was contracted bona fide and for an adequate and full consideration in money or money's worth. . . . Liabilities imposed by law or arising out of torts are deductible.

Section 20.0-2(a) of the regulations provides, in part, that "[e]scheat of a decedent's property to the State for lack of heirs is a transfer which causes the property to be included in the decedent's gross estate."

The questions presented are whether the value of funds returned to the United States pursuant to 38 U.S.C. section 3202(e) is includible in a deceased veteran's gross estate for Federal estate tax purposes, and, if so, whether an estate tax deduction is allowable with respect to the value of such funds.

Regulation section 20.0-2(a), quoted above, requires that the value of property of a decedent that escheats to a state for lack of heirs be included in the decedent's gross estate under section 2033 of the Code as property in which the decedent possessed an interest at death. With respect to funds passing to the United States under 38 U.S.C. section 3202(e), the United States stands in the stead of the state as the sovereign government to which the property escheats. Accordingly, as in a case involving state escheat, the value of property passing to the United States under 38 U.S.C. section 3202(e) is includible in a decedent's gross estate under section 2033.

Rev. Rul. 75-533, 1975-2 C.B. 359, holds that the personal property of a deceased veteran that passes to the United States as trustee for the General Post Fund pursuant to the provisions of 38 U.S.C. section 5220(a) is includible in the deceased veteran's gross estate under section 2033 of the Code and is deductible in full as a claim against the estate for a charitable pledge pursuant to the provisions of section 20.2053-5 of the regulations. Rev. Rul. 76-542, 1976-2 C.B. 282, considers the situation where a veteran was mentally incompetent at all times from admission to a Veterans' Administration facility until death and thus was not competent to enter into a contract with the Veterans' Administration. Rev. Rul. 76-542 holds that the includible value of the deceased veteran's personal property is deductible as a liability imposed by law under section 20.2053-4 of the regulations.

Unlike the statutes (38 U.S.C. sections 5220-21) considered in Rev. Rul. 75-533 and Rev. Rul. 76-542, the statute now under consideration does not employ any contractual language as an alternative basis for its operation. The funds encompassed by 38 U.S.C. section 3202(e) are generally regarded as having been given gratuitously by the United States, subject to a reserved power of escheat. See, e.g., Coakley v. Attorney General, 318 Mass. 508, 62 N.E. 2d 659, 660 (1945); In re Estate of Warpouske, 352 P. 2d 539, 547 (Ore. 1960), rev'd on other grounds, United States v. Oregon, 366 U.S. 643 (1961).

Thus, the obligation to return to the United States the value of funds held by a fiduciary under 38 U.S.C. section 3202(e) is imposed solely by law without any requirement of a contract or agreement. As noted above, such a liability is deductible from a decedent's estate within the meaning of section 20.2053-4 of the regulations. See Rev. Rul. 76-542.

Accordingly, a deduction is allowable under section 2053 of the Code pursuant to section 20.2053-4 of the regulations for the value of funds passing to the United States under 38 U.S.C. section 3202(e).