Rev. Rul. 81-31
1981-1 C.B. 475, 1981-4 I.R.B. 30.
Internal Revenue Service
Revenue Ruling
DEATH BENEFIT
Published: January 26, 1981
SECTION 2511.--TRANSFERS IN GENERAL, 26 CFR 25.2511-1: Transfers in general
(Also Sections 2503, 2512; 25.2503-2, 25.2512-1.)
Death benefit. An employee entered into an employment contract in which the employer agreed to pay a death benefit of twice the annual salary at the time of death to the employee's surviving spouse, but only if the employee was still employed at the time of death. The death benefit was not funded. The employee made a gift of a present interest in the quarter in which death occurred-the time when the value of the death benefit became ascertainable-and the gift qualifies for the annual exclusion allowable under section 2503(b) of the Code.
ISSUE
What are the federal gift tax consequences of an employment contract which provides that, in consideration of future services to be rendered by the employee, the employer agrees to pay, under certain circumstances, the employee's surviving spouse a death benefit equal to twice the employee's annual salary at the date of death?
FACTS
On June 1, 1972, D, the donor, and X corporation entered into an employment contract whereby, in consideration of future services to be rendered by D to the corporation, the corporation agreed to pay a death benefit to D's surviving spouse if D was employed by the corporation at the date of death. Under the terms of the agreement, the death benefit was to be equal in amount to twice the annual salary of D at the date of D's death. D had no right to change the beneficiary, nor was any amount payable to D's estate in the event D's spouse predeceased D. The benefit was not funded in any manner.
At D's death in 1978, D was still employed by X, and the death benefit was paid to D's surviving spouse.
LAW AND ANALYSIS
Section 2511 of the Internal Revenue Code provides that the gift tax shall apply whether the gift is direct or indirect. Section 25.2511-1(c) of the Gift Tax Regulations provides that all transactions whereby property interests are gratuitously conferred upon another, regardless of the means employed, are subject to the gift tax.
Section 2512 of the Code provides that if a gift is made in property, its value at the date of the gift shall be considered the amount of the gift.
Section 2503(b) of the Code provides an exclusion of the first $3,000 of gifts (other than gifts of future interests in property) made to any person by the donor during the calendar year.
Section 25.2503-3 of the regulations provides that 'future interests' is a legal term and includes reversions, remainders, and other interests, whether vested or contingent, which are limited to commerce in use, possession or enjoyment at some future date or time.
It is well established for purposes of the estate tax that, in an appropriate case, a transfer by an employee can take place if, in consideration of an employee's past and future services, the employer promises to pay a survivor's benefit. Estate of Bogley v. United States, 514 F.2d 1027 (Ct. Cl. 1975). The provisions dealing with the estate tax and the gift tax should be interpreted in pari materia. Sanford v. Commissioner, 308 U.S. 39 (1939), 1939-2 C.B. 340.
A transfer is complete when the donor has so parted with dominion and control as to leave no power to change its disposition. Robinette v. Helvering, 318 U.S. 184 (1943), 1943 C.B. 1141. The fact that at the time of the transfer the right to the gift is subject to contingencies does not postpone the effective date of the gift if the transferred interest is susceptible of valuation. Rosenthal v. Commissioner, 205 F.2d 505 (2d Cir. 1953); Rev. Rul. 69-347, 1969-1 C.B. 227.
In the present case, D made an indirect transfer during D's lifetime, but it was not possible to ascertain the amount of the death benefit payable at the time D and X entered into the contract, or at any other time prior to D's death, because such amount is to be determined by reference to D's annual salary at death. In addition, payment of this amount is dependent on D's continued employment and marriage at death.
This situation is analogous to that described in Rev. Rul. 69-346, 1969-1 C.B. 227, where a taxpayer promised to transfer community property to a trust after the death of the taxpayer's spouse. The revenue ruling concluded that the agreement between
the taxpayer and spouse was enforceable when entered into, but it was not determinable at that time whether the taxpayer had made a gift and, if so, of what value. Thus, the taxpayer was not considered to have made a taxable gift until the death of the spouse, at which time the amount of the gift first became susceptible of valuation.
In the present case, as in Rev. Rul. 69-346, there was an inter vivos transfer by D, but the value of the transfer first became ascertainable in the calendar quarter in which D died. Since the transfer is treated as a completed gift in the calendar quarter in which D died, the gift, not then being limited to commence in use or possession at a future time, was of a present interest rather than a future interest. Consequently, the annual exclusion provided for in section 2503(b) is allowable with respect to the gift.
HOLDING
D made a gift of the value of the death benefit passing to D's surviving spouse. For federal gift tax purposes, the transfer became a completed gift in the calendar quarter in which D died, at which time the amount of the gift first became susceptible of valuation. Further, the gift qualifies for the annual exclusion allowable under section 2503(b).
If, in the present case, D had not been employed by X at the time of death, no benefit would have been payable to the surviving spouse. Under such circumstances, the transferred benefit would have had no value during the calendar quarter in which D died and the transfer would not then or before be subject to the gift tax.
Rev. Rul. 81-31, 1981-1 C.B. 475, 1981-4 I.R.B. 30.