REVENUE RULE 92-22

1992-1 C.B. 313, 1992-13 I.R.B. 19.

Internal Revenue Service
Revenue Ruling

ANNUITIES; INDIVIDUAL RETIREMENT ACCOUNTS; TRANSITION RULES

Published: March 30, 1992

Section 2039.  Annuities, 26 CFR 20.2039-5; Annuities under individual retirement plans.

Annuities; individual retirement accounts; transition rules. The proceeds of a decedent's individual retirement account that were rolled over from a qualified plan are includible in the gross estate of a decedent who died after December 31, 1982, if the decedent did not irrevocably elect the form of benefit before July 18, 1984, and was not in pay status on December 31, 1984

ISSUE

If a decedent, dying after 1984, did not change the form of benefit of an individual retirement account before death, did not irrevocably elect the form of benefit before July 18, 1984, and was not in pay status with respect to the account on December 31, 1984, are the proceeds of the account includible in the gross estate under section 2039 of the Internal Revenue Code?

FACTS

Situation 1. A retired from employment in June 1984, and died in 1988. Prior to retirement, A made contributions to an individual retirement account (IRA) described in section 408(a) of the Code, and designated B and C, A's children, as the beneficiaries of any account proceeds remaining at A's death. Prior to A's death, A had not received any distributions from the account and had not made any change or election (irrevocable or otherwise) as to the form of the benefit payable under the IRA. Upon A's death, the account proceeds became payable to B and C who elected, as permitted under tile trust instrument, to receive the account proceeds in the form of annuities.

Situation 2. The facts are the same as in Situation 1 except for the method of funding the IRA. During A's employment, A was a participant in a qualified employer-maintained pension plan described in section 401(a) of the Code. Upon retirement in June 1984, A transferred the proceeds from the plan into an IRA. The transfer was a qualified rollover described in section 402(a)(5).

LAW AND ANALYSIS

Section 2039(a) of the Code provides that the gross estate of a decedent includes the value of certain survivor annuities or other payments. Prior to the enactment of section 525 of the Tax Reform Act of 1984 (1984 TRA), 1984-3 (Vol. 1) C.B. 1, 381, section 2039 also provided that the gross estate did not include part or all of the value of otherwise includible annuities or other payments under certain retirement plans. Former section 2039(c) of the Code provided an exclusion for annuities or other payments to the extent attributable to employer contributions under certain employer-maintained retirement plans. Former section 2039(e) provided an exclusion with respect to certain individual retirement plans (including IRAs). Former section 2039(g) limited the amount of the exclusions under subsections (c) and (e) to $100,000 in the aggregate for estates of decedents dying after December 31, 1982, and before January 1, 1985.

The exclusions under section 2039 were repealed by section 525(a) of 1984 TRA, effective for the estates of decedents dying after December 31, 1984. However, under a transition rule in section 525(b)(2) of 1984 TRA, the exclusions in effect prior to the enactment of 1984 TRA continued to apply to the estate of a decedent who died after December 31, 1984, if the decedent was a participant in a plan and was in pay status on December 31, 1984, and had irrevocably elected the form of payment of the retirement and survivor benefit before July 18, 1984.

Section 1852(e)(3) of the Tax Reform Act of 1986 (1986 TRA), 1986-3 (Vol.1) C.B. 1, 785, amended the transition rule in 1984 TRA. The amendment extended the transition rule to certain individuals who "separated from service" before January 1, 1985. Under the 1986 TRA amendment, if the conditions for the exclusion under the 1984 TRA transition rule are otherwise met, any individual who "separated from service" prior to January 1, 1985, is treated as meeting the pay status and irrevocable election requirements of the 1984 TRA transition rule if the individual did not change the form of the retirement or survivor benefit prior to death.

Section 1852(e)(3) of 1986 TRA does not deal specifically with the situation in which an individual participant in an employer-provided retirement plan who otherwise meets the requirements of the transition rule (i.e., separation from service prior to January 1, 1985, and no change in the form of retirement or survivor benefits) transferred the proceeds from the plan to an IRA. If the basis on which Congress extended the transition rule in 1986 TRA was the notion that those individuals who separated from service prior to January 1, 1985, were caught unaware by the changes made in 1984 TRA, that same rationale would apply with equal force to individuals who separated from service prior to that date and rolled their accounts into an IRA. Nevertheless, the legislative history of section 1852(e)(3) unambiguously precludes that result. The Senate report states that ". . . as long as the other conditions for the grandfather are satisfied, an election is deemed to be irrevocable under a qualified plan (but not under an IRA) if the form of the benefit distribution elected is not changed prior to death." S. Rep. No. 99-313, 99th Cong., 2d Sess. 1019 (1986), 1986-3 (Vol. 3) C.B. 1, 1018. (Emphasis added.) This is consistent with the use of the term "separation from service" as a requirement for transition relief, as distributions from an IRA are not dependent on any separation from Service.

Therefore, the applicability of the estate tax exclusion under section 2039(e) for an IRA is determined without regard to the amendments made by 1986 TRA to the transition rule under 1984 TRA.

Accordingly, in Situation 1, although A had not changed the form of retirement benefit or survivor benefit before death, the proceeds of A's individual retirement account are includible in A's gross estate under section 2039(a) of the Code and do not qualify for the exclusion under section 2039(e), because A had not irrevocably elected the form of benefit before July 18, 1984, and was not in pay status on December 31, 1984.

In Situation 2 the proceeds of A's individual retirement account are attributable to proceeds rolled over from A's qualified pension plan. The pension plan was an employer-maintained plan and A had separated from service with the employer before 1985. When the pension plan proceeds were rolled over into the individual retirement account in a qualified rollover, the proceeds became proceeds of an IRA and not proceeds of an employer-maintained qualified plan. Therefore, the proceeds are subject to the estate tax rules governing IRAs.

Accordingly, in Situation 2, as in Situation 1, the proceeds of A's individual retirement account are includible in A's gross estate under section 2039(a) of the Code and do not qualify for the exclusion under repealed section 2039(e) because A had not irrevocably elected the form of benefit before July 18, 1984, and was not in pay status on December 31, 1984.

HOLDING

Section 1852(e)(3) of the 1986 Tax Reform Act does not apply to the proceeds of an individual retirement account, whether attributable to contributions by the decedent or proceeds rolled over from a qualified employer-maintained pension plan. Therefore, the account proceeds are includible in full in the gross estate of a decedent who died after 1984 if the decedent had not irrevocably elected the form of benefit before July 18, 1984, and was not in pay status on December 31, 1984.

DRAFTING INFORMATION

The principal author of this revenue ruling is William L. Blodgett of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, contact Mr. Blodgett on (202) 566-4788 (not a toll-free call).

Rev. Rul. 92-22, 1992-1 C.B. 313, 1992-13 I.R.B. 19.