Rev. Rul. 88-85

1988-2 C.B. 333, 1988-40 I.R.B. 9.

                       Internal Revenue Service

                                 Revenue Ruling

   ANNUITIES; QUALIFIED PLANS; IRAS; EFFECTIVE DATE PROVISIONS FOR INCLUSION

                           Published: October 3, 1988

SECTION 2039. - ANNUITIES, 26 CFR 20.2039-2: Annuities under "qualified plans" and section 403(b) annuity contracts

  Annuities; qualified plans; IRAs; effective date provisions for inclusion. The obsolescence of revenue rulings and revenue procedures to the extent that they refer to sections 2039(c), (d), (e), (f), or (g) of the Code for periods for which the Tax Reform Acts of 1984 and 1986 repealed those sections.

  Section 2039 of the Internal Revenue Code provides for inclusion of a survivor's annuity or other payment in the gross estate of a decedent. Before the enactment of section 525 of the Tax Reform Act of 1984, 1984-3 (Vol. 1) C.B. 2, 381, subsections (c), (d), (e), (f), and (g) of section 2039 provided special rules for exclusion from the gross estate of part or all of the value of the annuity or other payment.

  Section 2039(c) of the Code, as in effect before the Tax Reform Act of 1984, provided for the exclusion from a decedent's gross estate of part or all of the value of an annuity or other payment receivable by a surviving beneficiary if specific conditions were met. The excludable portion was based on the amount attributable to contributions made by the decedent's employer to a qualified pension, stock bonus, or profit-sharing plan, or made to a qualified retirement annuity contract.

  Section 2039(d) of the Code provided a similar exclusion from the gross estate of a spouse who predeceased the surviving spouse in the case of interests arising under community property laws.

  Section 2039(e) of the Code provided for an exclusion based on the value of an annuity receivable by any beneficiary under a qualified individual retirement account, an individual retirement annuity, or a retirement bond.

  Section 2039(f) of the Code specified which lump sum distributions did not qualify for exclusion from the estate of a decedent.

  The Tax Reform Act of 1984 repealed sections 2039(c), 2039(d), 2039(e), and 2039(f) effective for the estates of decedents dying after December 31, 1984. The repeal of sections 2039(c), 2039(d), 2039(e), and 2039(f) does not, however, apply to the estate of any decedent whose benefits were in pay status on December 31, 1984, and who had irrevocably elected the form of the benefit before July 18, 1984.

  Section 2039(g) of the Code provided for a $100,000 limitation on the exclusion available to a decedent's estate under subsections 2039(c), (d), and (e). This limitation, according to section 245 of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), 1982-2 C.B. 462, 522, was applicable to the estates of decedents dying after December 31, 1982. For the estates of decedents dying on or before December 31, 1982, TEFRA allowed the exclusion under sections 2039(c), (d), and (e) to remain unlimited.

  Section 525 of the Tax Reform Act of 1984 repealed section 2039(g) for estates of decedents dying after December 31, 1984. The repeal of section 2039(g) does not, however, apply to the estate of any decedent if the decedent's benefits were in pay status on December 31, 1984, and the decedent had irrevocably elected the form of the benefit before July 18, 1984. Thus, even though a decedent died after December 31, 1984, if the decedent's benefits were in pay status on December 31, 1984, and the decedent after December 31, 1982, and before July 18, 1984, had irrevocably elected the form of benefit, then the exclusion under sections 2039(c), (d), and (e) is limited to $100,000. If a decedent died after December 31, 1982, the decedent's benefits were in pay status on December 31, 1982, and the decedent had irrevocably elected the form of benefit on or before December 31, 1982, then, under section 525(b) of the Tax Reform Act of 1984, the exclusion under subsections (c), (d), and (e) of section 2039 is unlimited.

  Section 1852(e)(3) of the Tax Reform Act of 1986, 1986-3 (Vol. 1) C.B. 2, 785, amended section 525 of the Tax Reform Act of 1984 (1) to make an unlimited exclusion available to certain estates that otherwise would have been subject to the $100,000 limitation in section 2039(g), and (2) to make the exclusion under sections 2039(c), (d), and (e), subject to the limitation of section 2039(g), available to certain estates that otherwise would have been affected by the 1984 repeal of those provisions. With respect to the estate of decedent who died after December 31, 1982, if a decedent who was a participant in any qualified plan had separated from service before January 1, 1983, and the decedent had not changed the form of benefit before death, then, with respect to that benefit, the decedent shall be treated as having made an irrevocable election on or before December 31, 1982, and as being in pay status on December 31, 1982. In such a case, if otherwise qualified, the benefits received from the decedent are subject to the exclusions of sections 2039(c), 2039(d), and 2039(e) without limitation. Similarly, with respect to the estate of a decedent who died after December 31, 1984, if the decedent who was a participant in any plan had separated from service before January 1, 1985, and the decedent had not changed the form of benefit before death, then, with respect to that form of benefit, the decedent shall be treated as having made an irrevocable election on or before July 18, 1984, and as being in pay status on December 31, 1984. Thus, the benefits received from the decedent are not affected by the repeal of sections 2039(c), 2039(d), 2039(e), and 2039(g).

  The Tax Reform Act of 1984 added a new section 2039(c) of the Code, which, in general, continued the exclusion previously allowed under section 2039(d) from the gross estate of a predeceasing spouse under community property law for the value of an annuity attributable to the contributions by the employer of the surviving spouse. However, the Tax Reform Act of 1986 repealed section 2039(c) effective for estates of decedents dying after October 22, 1986.

  Section 2517 of the Code provides a gift tax exclusion for all or a portion of the qualified annuities or other payments which would be considered as gifts by an employee to the beneficiary where the employee irrevocably designates the beneficiary. The amount excluded is based on the amount of the gift attributable to the contributions made by the employer to qualified plans. The Tax Reform Act of 1984 did not change the gift tax treatment under section 2517. The Tax Reform Act of 1986 repealed section 2517 effective for transfers taking place after October 22, 1986.

  The Internal Revenue Service has undertaken a review of certain rulings that were published in the Internal Revenue Bulletin after 1954 which referred to sections 2039(c), (d), (e), (f), or (g) of the Code. The purpose of this revenue ruling is to publish a list of post-1954 rulings having application in the estate tax area which, although not specifically revoked or superseded, are no longer determinative with respect to inclusion in a decedent's gross estate of the portion of an annuity which is attributable to contribution of the decedent's employer to qualified plans for the estates of decedents dying after December 31, 1984, unless the decedent's benefits were in pay status on December 31, 1984, and the decedent had irrevocably elected the form of benefits before July 18, 1984.

  To the extent that they refer to sections 2039(c), (d), (e), (f), or  (g) of the Code for periods for which the Tax Reform Acts of 1984 and 1986 repealed those sections, the revenue rulings listed before are hereby declared to be obsolete.

               Revenue Ruling           Cumulative Bulletin

                   Number                     Citation

               ______________           ___________________

                   82-199                   1982-2, 211

                   80-158                   1980-1, 196

                   80-81                    1980-1, 203

                   79-301                   1979-2, 327

                   79-190                   1979-1, 299

                   78-282                   1978-2, 235

                   78-151                   1978-1, 291

                   77-222                   1977-1, 281

                   77-157                   1977-1, 279

                   77-139                   1977-1, 278

                   77-96                    1977-1, 277

                   77-95                    1977-1, 274

                   77-34                    1977-1, 276

                   76-416                   1976-2, 57

                   76-380                   1976-2, 270

                   75-505                   1975-2, 364

                   75-408                   1975-2, 366

                   75-176                   1975-1, 300

                   74-557                   1974-2, 301

                   74-119                   1974-1, 276

                   73-404                   1973-2, 319

                   72-332                   1972-2, 527

                   71-481                   1971-2, 330

                   70-211                   1970-1, 190

                   68-556                   1968-2, 408

                   68-294                   1968-1, 46

                   68-89                    1968-1, 402

                   67-371                   1967-2, 329

                   67-278                   1967-2, 323

                   67-37                    1967-1, 271

                   59-401                   1959-2, 121

                   59-254                   1959-2, 33

                   56-1                     1956-1, 444

  In addition, the revenue procedures listed below are hereby declared obsolete to the extent that they conflict with the amended section 2039 as set forth above.

              Revenue Procedure        Cumulative Bulletin

                   Number                     Citation

              _________________         ___________________

                    71-7                     1971-1, 671

                    71-6                     1971-1, 664

  Failure to include any particular ruling in the above list should not be construed as an indication that the ruling was not also rendered obsolete by the Tax Reform Act of 1984 and 1986.

                              DRAFTING INFORMATION

  The principal author of this revenue ruling is William L. Blodgett of the Individual Tax Division. For further information regarding this revenue ruling contact Mr. Blodgett on (202) 566-9043 (not a toll-free call).

Rev. Rul. 88-85, 1988-2 C.B. 333, 1988-40 I.R.B. 9.