Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 78-32

1978-1 C.B. 198

Sec. 691

IRS Headnote

Income in respect of decendent; sale of real property completed by executor. The gain realized from a sale of real property that was completed by the executor of a cash basis decedent who, prior to death, had entered into a binding executory contract for sale of the property and had substantially fulfilled the prerequisites to consummation of the sale is income in respect of a decedent under section 691(a) of the Code.

Full Text

Rev. Rul. 78-32

Advice has been requested whether, under the circumstances described below, the gain realized from the sale of real property is income in respect of a decedent within the meaning of section 691(a) of the Internal Revenue Code of 1954.

In June 1971, A, who used the cash receipts and disbursements method of accounting, acquired a tract of land for 50x dollars. On January 1, 1976, A signed a binding executory contract agreeing to sell the land to B for 70x dollars. The closing was scheduled for March 15, 1976. A died on February 5, 1976, after substantial fulfillment of the prerequisites to consummation of the sale. The remaining obligations to be performed were ministerial. A's executor completed the sale pursuant to the contract and transferred title and possession of the land to B on March 15, 1976.

Section 691(a) of the Code provides, in part, that the amount of all items of gross income in respect of a decedent that are not properly includible in respect of the taxable period in which falls the date of death or a prior period shall be included in the gross income, for the taxable year when received, of: (1) the estate of the decedent, if the right to receive the amount is acquired by the decedent's estate from the decedent; (2) the person who, by reason of the death of the decedent, acquires the right to receive the amount, if the right to receive the amount is not acquired by the decedent's estate from the decedent; or (3) the person who acquires from the decedent the right to receive the amount by bequest, devise, or inheritance, if the amount is received after a distribution by the decedent's estate of such right.

Section 1.691(a)-1(b) of the Income Tax Regulations provides, in general, that the term "income in respect of a decedent" refers to those amounts to which a decedent was entitled as gross income, but which were not properly includible in computing taxable income for the taxable year ending with the date of death or for a previous taxable year under the method of accounting employed by the decedent. Specifically, section 1.691(a)-1(b)(3) of the regulations provides that the term "income in respect of a decedent" includes income to which the decedent had a contingent claim at the time of death.

Based on section 1.691(a)-1(b) of the regulations, the United States Court of Appeals for the Fifth Circuit, in Trust Company of Georgia v. Ross, 392 F.2d 694 (5th Cir. 1967), cert. denied, 393 U.S. 830, adopted the "entitlement test" for purposes of determining whether income from the disposition of property owned by a decedent is taxable as income in respect of a decedent. Under this test, such income is to be included in the gross income of the recipient under section 691 of the Code if the decedent was entitled to the income at the date of death. Applying this standard to the facts before it, the court in Trust Company of Georgia held that, because the decedent was entitled to the proceeds of a sale of stock under an executory contract binding at the time of death, the gain realized on the proceeds of the contract was income in respect of a decedent. See also Keck v. Commissioner, 415 F.2d 531 (6th Cir. 1969), rev'g 49 T.C. 313 (1968).

In the instant case, A entered into a binding contract prior to death. At the time of death, A had substantially fulfilled all of the substantive prerequisites to consummation of the sale and was unconditionally entitled to the proceeds of the sale at the time of death. Accordingly, the gain realized from the sale of A's real property is income in respect of a decedent within the meaning of section 691(a) of the Code.