Rev. Rul. 81-63
1981-1 C.B. 455, 1981-8 I.R.B. 53.
Internal Revenue Service
Revenue Ruling
STATE PUBLIC HOUSING AGENCY BONDS; RECOGNITION OF GAINS; INCLUSION IN
GROSS ESTATE
Published: February 23, 1981
SECTION 2033.--PROPERTY IN WHICH THE DECEDENT HAD AN INTEREST, 26 CFR 20.2033- 1: property in which the decedent had an interest
(Also Section 1001; 1.1001-1.)
State public housing agency bonds; recognition of gains; inclusion in gross estate. The provisions of the U.S. Housing Act of 1937 do not preclude recognition of gain on the sale of state public housing agency bonds and inclusion of the bonds in the gross estate of the deceased owner.
ISSUES
(1) Are bonds issued by a state public housing agency in connection with a low-income housing project includible, for federal estate tax purposes, in the gross estate of the deceased owner of the bonds?
(2) Is gain recognized for federal income tax purposes, with respect to the sale of state public housing agency bonds issued in connection with a low- income housing project?
FACTS
In 1975, D purchased, for 80x dollars, short-term bonds originally issued by the State X public housing agency for face value in connection with a low- income housing project.
The bonds have a total face value of 100x dollars. They bear the certificate of the Secretary of the United States Department of Housing and Urban Development that the bonds are secured by a pledge of a loan to the state agency under an agreement between the Secretary and the state agency.
In 1977, D sold one half of the bonds, with a basis of 40x dollars, for 45x dollars. D thus realized a gain of 5x dollars on the sale of the bonds.
D continued to own the remaining State X public housing agency bonds until the date of D's death, in 1978. The fair market value of the bonds on the date of D's death was 48x dollars.
Section 11(b) of the United States Housing Act of 1937, Pub. L. 412 ch. 896, 50 Stat. 893, as amended by Pub. L. 93-383, section 201(a), 88 Stat. 667, 42 U.S.C. section 1437i(b) (1974), 1974-2 C.B. 418, 419, provides that certain obligations, including interest thereon, issued by public housing agencies in connection with low-income housing projects 'shall be exempt from all taxation now or hereafter imposed by the United States. . . .'
ISSUE 1
LAW AND ANALYSIS
Section 2033 of the Internal Revenue Code provides that the gross estate of a decedent shall include the value of all property interests which the decedent held at the date of death. Section 20.2033-1 of the Estate Tax Regulations provides that statutory provisions which exempt bonds, etc., and the interest thereon from taxation are generally not applicable to the estate tax. Such tax is an excise tax on the transfer of property at death and is not a tax on the property transferred.
In Greiner v. Lewellyn, 258 U.S. 384 (1922), I-1 C.B. 467 (1922), the Court held that tax-exempt municipal bonds are subject to the federal estate tax because the tax is an excise tax on the decedent's right to transfer wealth at death, and not a tax on the property itself. The same distinction has been applied to construing statutory exemptions from federal tax, as these exemptions pertain to the estate tax. See United States Trust Company v. Helvering, 307 U.S. 57 (1939), 1939-1 (Part 1), C.B. 330, applying the estate tax to proceeds of war risk life insurance which insurance, under the applicable federal statute, was '. . . exempt from all taxation.' See also Rev. Rul. 55-622, 1955-2 C.B. 385.
ISSUE 2
LAW AND ANALYSIS
Section 1001(a) of the Code provides that the gain from the sale or other disposition of property shall be the excess of the
amount realized therefrom over the adjusted basis in the property. Section 1001(c) (formerly section 1002) provides that, except as otherwise provided in subtitle A, the entire amount of gain or loss on the sale or exchange of property shall be recognized.
Section 1.1002-1(b) of the Income Tax Regulations, now applicable to section 1001(c) of the Code, provides in pertinent part that exceptions from the general rule of recognition of gain and loss, like other exceptions from a rule of taxation of general and uniform application, are strictly construed and do not extend either beyond their words or the underlying assumptions and purposes of the exception. See United States v. Stewart, 311 U.S. 60, 71 (1940), 1940-2 C.B. 199, in which the Supreme Court held that a provision of the Federal Farm Loan Act of 1916, Pub. L. 158, 39 Stat. 360, which stated that farm loan bonds issued under such Act '. .. and the income derived therefrom shall be exempt from Federal, State, municipal, and local taxation' did not exempt profits derived from the sale of such bonds from taxation. The Court noted that income derived from mere ownership of bonds is analytically distinct from income derived from dealings or transactions in such bonds. See also Willcuts v. Bunn, 282 U.S. 216 (1931), X-I C.B. 309 (1931).
Section 11(b) of the United States Housing Act of 1937 exempts the obligation, and the interest thereon, from any federal tax. However, any gain or loss realized from the sale or exchange of such obligations shall be subject to federal income tax because the tax is imposed upon the income derived from the sale or exchange (not upon the obligation itself) and because the income derived from the sale or exchange is not interest income.
HOLDINGS
(1) The value of state X public housing agency bonds held by D at the date of death, 48x dollars, is includible in D's federal gross estate, under section 2033 of the Code, as property in which the decedent held an interest at death.
(2) The 5x dollars of gain realized by D on the sale of bonds is not exempt from federal income taxation and shall be recognized pursuant to section 1001(c) of the Code.
Rev. Rul. 81-63, 1981-1 C.B. 455, 1981-8 I.R.B. 53.