Rev. Rul. 87-98

1987-2 C.B. 206, 1987-39 I.R.B. 15.

BASIS; PROPERTY ACQUIRED FROM DECEDENT; COMMUNITY PROPERTY

Published: September 28, 1987

SECTION 1014. - BASIS OF PROPERTY ACQUIRED FROM A DECEDENT, 26 CFR 1.1014-1: Basis of property acquired from a decedent.

  Basis; property acquired from decedent; community property. Property held in joint tenancy is community property for purposes of section 1014(b)(6) of the Code if its status was community property under state law.

ISSUE

  If property is held in a common law estate but, for state law purposes, the property is characterized as community property, then is that property community property for purposes of section 1014(b)(6) of the Internal Revenue Code?

FACTS

  D and D's spouse S, residents of community property state X, purchased real property in X with community funds and took title as joint tenants with rights of survivorship. However, D and § later executed joint wills in which they declared the property to be a community asset.

  Although X is a community property state, under the laws of X, spouses may hold property in joint tenancy or other common law estate. Because the laws of X do not make specific provision for the coexistence of common law estate and a community property interest, taking title in a common law estate raises the presumption that the spouses intended to terminate the community interest, effectively transmuting the property's character from community to separate. This presumption is overcome by evidence that the spouses intended for the property not to be transmuted to separate property, in such a case, the community nature of the property is preserved. Under the law of X, an express statement of such intent in joint wills precludes transmutation by reason of taking title in joint tenancy.

  D died in 1985. At the time of D's death, the fair market value of the property was 100x dollars. The value of D's one-half interest in the property was included in D's estate for federal estate tax purposes.

LAW AND ANALYSIS

  Section 1012 of the Code provides that the basis of property shall be the cost of such property.

  Section 1014(a) of the Code provides that the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall be the fair market value of the property at the decedent's death.

  Section 1014(b)(6) of the Code provides that the surviving spouse's one-half share of community property held by the decedent and the surviving spouse under the community property laws of any state shall be considered to have been acquired from the decedent if at least one-half of the whole of the community interest in the property was includible in determining the value of the decedent's gross estate for federal estate tax purposes.

  Rev. Rul. 68-80, 1968-1 C.B. 348, concerns property that was obtained by a husband and wife as tenants in common. Even though acquired in exchange for community assets, it constituted separate property under state law. The ruling holds that the property was not community property for purposes of section 1014(b)(6). Accordingly, the surviving spouse's interest did not take a fair market value basis on the death of the first spouse. However, the controlling factor was the state law determination that the property did not constitute community property. See Morgan v. Commissioner, 309 U.S. 78 (1940) (local law creates legal rights and interests; federal law determines the federal tax treatment thereof).

  In the present situation, under the laws of X, the property remained community property. Even though the property was held in joint tenancy, a common law estate, the clear intention of D and S, as expressed in their joint wills, prevented its transmutation to separate property. Because it is community property under state law, it is also community property within the meaning of section 1014(b)(6). Therefore, S's interest in one-half of the property receives a fair market value basis under section 1014(a). The interest in the one-half of the property that was considered to have padded from D and that was included in D's estate also receives a fair market value basis pursuant to the provisions of section 1014(a). Accordingly, after D's death, § owns the entire property with a basis of 100x dollars.

HOLDING

  If property held in a common law estate is community property under state law, it is community property for purposes of section 1014(b)(6) of the Code, regardless of the form in which title was taken.

Rev. Rul. 87-98, 1987-2 C.B. 206, 1987-39 I.R.B. 15