1986-2 C.B. 82, 1986-36 I.R.B. 15.
ESTATES; DISTRIBUTIONS OF ASSETS EQUAL TO STATED FAIR MARKET VALUE
Published: September 8, 1986
Section 663.-Special Rules Applicable to Sections 661 and 662, 26 CFR 1.663(a)-
1: Special Rules Applicable to Sections 661 and 662; exclusions; gifts; bequests, etc
(Also Sections 661, 662; 1.661(a)-2.)
Estates; distributions of assets equal to stated fair market value. A bequest of unspecified assets with a fair market value specified in decedent's will is a bequest of a "specified sum of money" under section 663(a) of the Code. Furthermore, the bequest creates a right to receive a specific dollar amount the satisfaction of which results in the recognition of gain or loss to the estate.
ISSUE
1. Whether a bequest of 'assets, in cash or in kind or partly in each,' with a fair market value a date of distribution equal to a specified amount is a bequest of a 'specific sum of money' under section 663(a) of the Internal Revenue Code.
2. Whether such a bequest creates a right to receive a 'specific dollar amount' described in section 1.661(a)-2(f)(1) of the regulations whose satisfaction by a distribution of property in kind will result in the realization of gain or loss by the estate.
FACTS
The decedent's will created a trust with the following provisions:
I give assets, in cash or in kind or partly in each, the selection of which shall be in the absolute discretion of my executor, with a fair market value at the date of distribution equal to 2,000x dollars, to the trustee hereinafter named, to be held, administered and distributed as hereinafter provided.
On the date of distribution, the executor satisfied the bequest by transferring to the trust securities of X corporation that has been owned by the decedent and had a fair market value of 2,000x dollars and an adjusted basis of 2,500x dollars.
LAW AND ANALYSIS
Section 661(a) of the Internal Revenue Code allows as a deduction (not in excess of the distributable net income of the estate) in computing the taxable income of an estate, the sum of (1) any amount of income for such taxable year required to be distributed currently; and (2) any other amounts properly paid or credited or required to be distributed for such taxable year.
Section 663(a) of the Code provides that there shall not be included as amounts falling within section 661(a) and 662(a) any amount that, under the terms of the governing instrument, is properly paid or credited as a bequest of a specific sum of money or of specific property and that is paid or credited all at once or in not more than three installments.
Section 1.663(a)-1(b)(1) of the Income Tax Regulations provides that in order to qualify as a gift or bequest of a specific sum of money or of specific property under section 663(a), the amount of money or the identity of the specific property must be ascertainable under the terms of a testator's will as of the date of death.
In this case, the decedent made a bequest of assets of a specified monetary value to be conveyed by the executor in cash or in kind, or partly in each, as the executor might determine. Since the monetary value of the bequest is ascertainable under the terms of the will as of the date of the decedent's death (subject only to availability of assets in the estate to satisfy the bequest), the bequest is of a specific sum of money for purposes of section
663(a) of the Code, notwithstanding that it may be paid in property other than money. See Rev. Rul. 82-4, 1982-1 C.B. 99, and Rev. Rul. 66-207, 1966-2 C.B.
243. Consequently, the estate is not allowed a deduction under section 661(a) of the Code in computing the taxable income of the estate when it pays the bequest.
Section 1.661(a)-2(f)(1) of the regulations provides that gain or loss is realized by the estate by reason of a distribution of property in kind if the distribution is in satisfaction of a right to receive a distribution in a specific dollar amount or in specific property other than that distributed.
Section 643(d)(3) of the Code provides an estate with an election to recognize gain or loss in the case of distributions of property. If the estate does not elect to recognize gain or loss, the basis of the property received by the beneficiary is generally the same as the estate's basis immediately before the distribution. As reflected in the legislative history of the Tax Reform Act of 1984, however, this election does not apply in those cases where a distribution of property results in recognition of gain or loss to the estate without regard to the enactment of section 643(d).
Since the distribution of the securities by the executor to the trustee is in satisfaction of a right to receive a 'specific dollar amount' of 2,000x dollars, the satisfaction causes the estate to realize gain or loss under section 1.661(a)-2(f)(1) of the regulations. The executor transferred to the trust assets in kind that have depreciated from 2,500x dollars in satisfaction of the trust's right to receive a distribution in a specific dollar amount of
2,000x dollars. Therefore, the estate will realize a loss of 500x dollars
(2,000x - 2,500x dollars) on the distribution of the shares of stock.
Section 662(a) of the Code provides rules for including in the gross income of a beneficiary of an estate described in section 661 the amounts specified in section 661(a) that are paid, credited, or required to be distributed. As noted above, section 663(a) of the Code provides that any amount that, under the terms of the governing instrument, is properly paid or credited as a bequest of a specific sum of money is not included in section 662(a). Consequently, the beneficiary does not include any amount in gross income under section 662(a) of the Code upon receipt of the bequest.
HOLDING
1. A bequest of 'assets, in cash or in kind or partly in each,' with a fair market value at date of distribution equal to a specified amount is a bequest of a 'specific sum of money' under section 663(a) of the Code.
2. The bequest of unspecified property with a specified value at the date of distribution creates a right to receive a 'specific dollar amount' under section 1.661(a)-2(f)(1) of the regulations. Therefore, gain or loss is realized by the estate upon a distribution in kind.
Rev. Rul. 86-105, 1986-2 C.B. 82, 1986-36 I.R.B. 15.