Rev. Rul. 81-15

1981-1 C.B. 457, 1981-2 I.R.B. 26.

                       Internal Revenue Service
                                 Revenue Ruling

                   STOCK TRANSFERRED IN TRUST; RETAINED POWER

                          Published: January 12, 1981

SECTION 2036.--TRANSFERS WITH RETAINED LIFE ESTATE, 26 CFR 20.2036-1: Transfers with retained life estate

  Stock transferred in trust; retained power. In view of the Byrum decision and the enactment of section 2036(b) of the Code, Rev.  Rul. 67-54 is revoked.

ISSUE

  The Internal Revenue Service has been asked to reconsider Rev. Rul. 67-54, 1967-1 C.B. 269, in view of the Supreme Court decision in United States v. Byrum, 408 U.S. 125 (1972), 1972-2 C.B. 518, and the enactment of section 2036(b) of the Internal Revenue Code.

FACTS

  In Rev. Rul. 67-54, the decedent transferred assets to a corporation which issued nonvoting preferred stock and debentures, for the full current value of the assets transferred.  The corporation also issued 10 shares of voting and 990 shares of nonvoting common stock.  The decedent transferred the 990 shares of nonvoting stock in trust for the benefit of his children.  The trust owned the 990 shares at the date of decedent's death.  Under the terms of the trust, the trustee could not dispose of the stock without the consent of the decedent.  Under an alternative fact situation, the grantor designated himself as trustee.

  Rev. Rul. 67-54 concludes that the decedent has retained control of the corporate dividend policy through retention of the voting stock and, thus, has retained the right to determine the income from the nonvoting stock.  The decedent has also retained control over the disposition of the nonvoting stock, either as trustee or as a result of the restrictions on the trustee's power to dispose of the stock.  The ruling holds that the decedent's retention of the right to control income and the restriction on disposition amount to a transfer whereby the decedent has retained for life or for a period which in fact did not end before death the right to designate the persons who shall enjoy the transferred property or income therefrom. Therefore, the property is includible in decedent's gross estate under section 2036(a)(2) of the Code.

  Rev. Rul. 67-54 also holds that, pursuant to section 2031 of the Code, the value of the nonvoting shares included in the gross estate should reflect the additional value inherent in the closely held voting shares by reason of control of company policies.

LAW AND ANALYSIS

  Section 2036(a)(2) of the Code provides that the value of the gross estate shall include the value of any interest in property transferred by a decedent if the decedent has retained for life the right, alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.

  In United States v. Byrum, the Supreme Court addressed the issue of includibility of transferred stock where the decedent had transferred the stock in trust, retaining the right to vote the transferred shares, the right to veto the sale of acquisition of trust property and the right to replace the trustee.

  The court concluded that because of the fiduciary constraints imposed on corporate directors and controlling shareholders, the decedent "did not have an unconstrained de facto power to regulate the flow of dividends, much less the right to designate who was to enjoy the income."  See Byrum, supra at 143.

  Thus, Byrum overruled the proposition on which Rev. Rul. 67-54 was based;  that is, that a decedent's retention of voting control of a corporation, coupled with restrictions on the disposition of the stock, is equivalent to the right to designate the person who shall enjoy the income.

  Section 2036(b)(1), added by the Tax Reform Act of 1976, 1976-3 C.B. (Vol. 1) 1, as amended by the Revenue Act of 1978, section 702(i), 1978-3 C.B. (Vol. 1) 1, 165, provides that for purposes of section 2036(a)(1), the direct or indirect retention of voting rights in transferred stock of a controlled corporation shall be considered to a retention of the enjoyment of transferred property.

  The Senate Finance Committee Report relating to section 2036(b)(1) provides as follows:

    The rule would not apply to the transfer of stock in a controlled corporation where the decedent could not vote the transferred stock.  For example, where a decedent transfers stock in a controlled corporation to his son and does not have the power to vote the stock any time during the 3-year period before his death, the rule does not apply even where the decedent owned, or could vote, a majority of the stock.  Similarly, where the decedent owned both voting and nonvoting stock and transferred the nonvoting stock to another person, the rule does not apply to the nonvoting stock simply because of the decedent's ownership of the voting stock.  S.Rep.No. 95-745, 95th Cong., 2d Sess. 91 (1978).

  The legislative history of section 2036(b) demonstrates that the rule of that section will not apply to the transfer of stock in a controlled corporation where the decedent could not vote the transferred stock.  Thus, the effect of Byrum on Rev. Rul. 67-54 is not changed by the enactment of section 2036(b) of the Code.

HOLDING

  In view of United States v. Byrum, and the enactment of section 2036(b) of the Code, Rev. Rul. 67-54 is revoked.  However, the Service will continue to apply the general principles of valuation under section 2031, noted in the revenue ruling.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 67-54 is revoked.

Rev. Rul. 81-15, 1981-1 C.B. 457, 1981-2 I.R.B. 26.