Rev. Rul. 85-100

1985-2 C.B. 200, 1985-29 I.R.B. 10.

MARITAL DEDUCTION; ALTERNATE VALUATION DATE; CONTINGENT INTEREST

Published: July 22, 1985

SECTION 2056.-BEQUESTS, ETC., TO SURVIVING SPOUSE, 26 CFR 20.2056(b)-1: Marital deduction limitation in case of the estate or other 'terminable interest'

(Also Sections 2032, 2039, 20.2032-1, 20.2039-1.)

  Marital deduction; alternate valuation date; contingent interest. A surviving spouse's interest in property will not qualify for the marital deduction where another party has an interest in the property on the decedent's date of death but that interest is extinguished prior to the alternate valuation date as elected by the executor of the decedent's estate.

ISSUE

  Does an employee death benefit annuity qualify for the marital deduction under section 2056(a) of the Internal Revenue Code, if another person's contingent interest therein will be extinguished before the alternate valuation date of section 2032 of the Code?

FACTS

  Decedent, D died on February 1, 1983, survived by a spouse, S, and a minor child. Prior to D's death, D had the right to receive annuity payments for life. Under the terms of the annuity contract, at D's death the payments would continue to § for life. If § died leaving minor children, the payments would continue to the minor children until the last surviving child of D and § reached 18, at which time any remaining excess of the cost of the contract over the annuity payments already made would be refunded to the surviving children. If § died leaving no surviving minor children, the excess, if any, was to be refunded to S's estate. C reached age 18 on June 5, 1983. Thus, had § died prior to June 5, 1983, C would have been entitled to payments on the annuity (and refund of the excess of the contract cost over the annuity payments). Because § survived until June 5, 1983, § became entitled to receive all of the payments of the annuity until S's death and to have the excess of the cost of the contract over the sum of the annuity payments distributed to S's estate.

  The executor timely filed the estate tax return on November 1, 1983, and elected to value all the property included in D's gross estate as of August 1, 1983, the alternate valuation date. No election was made to treat any property in D's estate as qualified terminable interest property.

LAW AND ANALYSIS

  Section 2032(a) of the Code states that the value of a decedent's gross estate may be determined, if the executor so elects, by valuing all the property included in the gross estate as of the date six months after the decedent's death for property which has not been distributed, sold, exchanged, or otherwise disposed of proper to that date (commonly referred to as the 'alternate valuation date'). Under section 2032(a)(3), if such an election is made, any interest affected by a mere lapse of time will be included at its date of death value (instead of the alternate valuation date) with adjustment for any difference in its value as of the alternate valuation date not due to mere lapse in time.

  Section 2056(a) of the Code allows a deduction from the value of the gross estate of the value of certain property interests that are included in the decedent's gross estate and that pass from the decedent to the surviving spouse.

  Under section 2056(a)(1), however, no deduction is allowed for any property interest that passes to the surviving spouse and that may terminate or fail on the lapse of time or the occurrence or the failure to occur of some contingency, if (1) another interest in the same property has also passed from the decedent to some other person for less than an adequate and full consideration in money or money's worth, and (ii) by reason of the passing of such interest, such other person may possess or enjoy any part of the property after the termination of the spouse's interest.

  Whether a property interest meets the requirements of section 2056(b) of the Code must be determined in light of events at the time of the decedent's death. Allen v. United States, 359 F.2d 151, 154 (2d Cir. 1966), cert. denied, 385 U.S. 832 (1966). See Shedd's Estate v. Commissioner, 237 F.2d. 345, 350-351 (9th Cir. 1956), cert. denied. 352 U.S. 1024 (1957). An election to value all property included in the gross estate as of the alternate valuation date under section 2032 does not affect the determination of whether a property interest meets the requirements of section 2056(b). Section 2032(b) provides that no deduction from the gross estate shall be allowed for any item if allowance of that item is in effect given by selection of the alternate valuation date under section 2032. With respect to the marital deduction, Senate Report No. 1013 (Part 2), 80th Cong., 2d Sess. 10 (1948), 1948-1 C.B.338, states:

  The election of the executor to determine the value of the gross estate of a date subsequent to the decedent's death, as provided in section 811(j) of the Code (the Internal Revenue Code of 1939, the predecessor to section 2032 of the Internal Revenue Code of 1954), does not extend to such later date the time for determining the character of the interest passing to the surviving spouse and its deductibility  under (section 812(e)(1)(B) of the 1939 Code, the predecessor to section 2056(b) of the 1954 Code). Section 811(j) relates only to valuation and applies only with respect to interest at the date of the decedent's death....

  In this case, the annuity received by § at D's death constituted a terminable interest. Moreover, at the date of D's death, C had a contingent right to the annuity payments if S, the surviving spouse, should die before C reached 18 years of age. Because C received an interest in the annuity at D's death and could enjoy the interest after the termination of S's interest, at D's death S's interest is a nondeductible terminable interest as described in section 2056(b) of the Code.

  Therefore, as of the date of D's death, the value of the annuity passing to § (to the extent includible in D's gross estate) does not qualify for the marital deduction under section 2056(a) of the Code.

  If D had died after C had reached age 18, the value of the annuity which passed to § would have been a deductible terminable interest under section 2056(a) of the Code because no other person would have had a right to possess or enjoy the property after the termination of S's interest.

HOLDING

  The value of the annuity does not qualify for the marital deduction under section 2056 of the Code, even though another person's contingent interest will be extinguished before the alternate valuation date under section 2032, as elected by the decedent's estate.

Rev. Rul. 85-100, 1985-2 C.B. 200, 1985-29 I.R.B. 10.