Rev. Rul. 68-556

Advice has been requested as to the amount includible in a decedent's gross estate under section 2039(a) of the Internal Revenue Code of 1954 by reason of the lump sum payable to his widow under a qualified employees' profit-sharing plan.

The decedent was a participant until the time of his death in his employer's retirement income and thrift incentive plan, a qualified plan which meets the requirements of section 401(a) of the Code.

Under the provisions of the plan, an employee entitled to participate is not required to make any contributions of his own, but he may voluntarily elect to contribute not less than 2 percent nor more than 5 percent of his annual compensation. He has the continuing right either to decrease or discontinue his own such contribution, or at anytime, to withdraw those contributions without earnings thereon. The company contributes annually to the plan a specified percentage of its corporate net income before taxes. All credits of a participant (other than the amount of his own fully vested contributions) become fully vested upon termination of his employment by reason of death, permanent disability or retirement, or upon termination of the plan or complete discontinuance of contributions thereunder.

Although the contributions of a participant and the contributions of the employer are both deposited in the same trust fund, the contributions voluntarily made by a participant and the increments thereon are at all times accounted for separately from the contributions made by the employer and the increment thereon. The participant contributions are invested in government obligations, while company contributions are invested in common stock of the company.

At the date of decedent's death, there was standing to his credit the sum of 561 x dollars, which amount was distributed under the provisions of the plan in a lump sum to his widow as designated beneficiary. Of this amount, 106 x dollars (91 x dollars contribution plus 15 x dollars increment) was attributable to the decedent's contribution and 455 x dollars (164 x dollars allocation plus 291 x dollars increment) was attributable to the company's contribution.

Section 2039(c) of the Code provides that, notwithstanding any other provision of law, the value of an annuity or other payment receivable by a beneficiary under an employee's trust forming part of a pension, stock bonus, or profit-sharing plan which, at the time of the decedent's separation from employment (whether by death or otherwise), or at the time of the termination of the plan, if earlier, met the requirements of section 401(a) of the Code, shall be excluded from the gross estate. It further provides that if the amounts payable after the death of the decedent under a qualified plan are attributable to any extent to payments or contributions made by the decedent, no exclusion is to be allowed for the proportionate value of such payments.

Section 20.2039-2(c) of the Estate Tax Regulations provides that the amount to be excluded from a decedent's gross estate under section 2039(c) of the Code is an amount which bears the same ratio to the value at the decedent's death of the annuity or other payment receivable by the beneficiary as the employer's contribution on the employee's account to the plan bears to the total contributions on the employee's account to the plan. Thus, the includable amount of any benefit payable to a beneficiary, other than decedent's estate, under a qualified employees' plan is limited to that portion of the benefit which is attributable to decedent's contribution.

In Commissioner v. Estate of Raymond W. Albright , 356 F.2d 319 (1966), the United States Court of Appeals had before it for consideration the issue whether a proportionate part of the lump sum payment received by a decedent's beneficiary under a retirement annuity contract was excludable from the decedent's estate when the payment represented a refund of the decedent's contribution toward the cost of the contract. In that case the court stated that the apportionment formula provided in section 2039(c) of the Code `is only applicable in situations in which the decedent's beneficiary receives a payment that is attributable to the contributions of both employer and employee. In such a situation the purpose of apportionment would be to insure that only the proportionate part of this payment that reflects the proportion the decedent-employee's contributions bore to the contributions of both employee and employer were included.' Inasmuch as the payment received by the beneficiary was solely attributable to the decedent's contributions to the contract, the court held that the apportionment formula set out in section 2039 of the Code was inapplicable.

In those situations where the contributions of the employee and those of the employer are at all times handled as two separate accounts, one comprised solely of contributions of the employee plus earnings thereon and the other comprised solely of contributions of the employer plus earnings thereon, the amount of the payment attributable solely to the employee's contributions is precisely determinable. Under these circumstances, resort to the apportionment formula is neither necessary nor appropriate.

In the instant case, the contributions of the decedent and the increments thereon were, under the provisions of the plan, continuously segregated into a separate account, separately invested, and at all times precisely determinable.

Accordingly, it is held that the amount includible in decedent's gross estate under section 2039(a) of the Code by reason of the lump sum payable to his widow under the provisions of the plan is 106 x dollars, the aggregate amount of the decedent's own contribution to the plan plus the increments thereon.