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 Rev. Rul. 79-62

1979-1 C.B. 295

Section 2035 -- Gifts Within 3 Years of Death

IRS Headnote

Transfer in contemplation of death; reversionary interest. In 1975, decedent transferred, in contemplation of death, a reversionary interest in trust property, the value of which was more than 5 percent of the trust property. Immediately before decedent's death in 1976, however, the value of the reversionary interest was less than 5 percent of the value of the trust property. None of the property is includible in decedent's gross estate under section 2035 of the Code.

Full Text

Rev. Rul. 79-62

ISSUE

What is includible in a decedent's gross estate under section 2035, if the decedent, in contemplation of death, transferred a reversionary interest in property as described in section 2037 and if the value of the reversionary interest immediately before the decedent's death would have been less than five percent of the value of the property? FACTS

In 1950, D transferred property in trust with the income payable to A during A's life. The remainder interest in the trust property was to revert to D, if D survived A. If D predeceased A, the remainder interest was to vest in C. In 1975, D in contemplation of death, assigned the reversion to C. At the time of the assignment, the value of the trust property was 150x dollars, and the value of the reversionary interest exceeded five percent of the value of the trust property. D died in 1976, survived by A. Immediately before D's death, the value of the trust property was 155x dollars. If D had not assigned the reversionary interest, the value of that interest at the time of D's death would have been less than five percent of the value of the trust property.

LAW AND ANALYSIS

At the time of D's death, section 2035(a) of the Internal Revenue Code of 1954 provided that the gross estate shall include the value of any interest in property transferred by the decedent in contemplation of death, unless the transfer was a bona fide sale for an adequate and full consideration in money or money's worth.

Section 20.2035-1(b) of the Estate Tax Regulations states that if the decedent transferred an interest in property or relinquished a power in contemplation of death, the gross estate includes the property that would be included under section 2036, 2037, or 2038 if the decedent had retained the interest or power until death.

Section 2037(a) of the Code provides that the gross estate includes the value of a property interest that a decedent transferred, if (1) possession or enjoyment of the property, through ownership of such interest, can be obtained only by surviving the decedent, (2) the decedent has retained a reversionary interest in the property, and (3) the value of such reversionary interest immediately before the decedent's death exceeds 5 percent of the value of such property.

If D had not assigned D's reversionary interest in the trust property, the first two requirements of section 2037(a) would have been met. C could obtain possession or enjoyment of the trust property only by surviving D. See example (3) in section 20.2037-1(e) of the Estate Tax Regulations. Further, under the terms of the trust instrument, there was a possibility that the trust property would return to D under certain circumstances. The third requirement of section 2037(a) would not have been satisfied, because the present value of the reversionary interest immediately before D's death was less than five percent of the value of the trust property. Thus, if D had retained until death the reversionary interest in the trust property, none of the property would have been includible in D's gross estate under the provisions of section 2037(a).

HOLDING

If the decedent had retained the reversionary interest in transferred property until death, none of the transferred property would have been includible under section 2037 of the Code, because the value of the reversionary interest immediately before the decedent's death would have been less than five percent of the value of the trust property. Therefore, none of the trust property is includible under section 2035 even though the decedent transferred the reversionary interest in contemplation of death.