Rev. Rul. 70-143
Rev. Rul. 70-143; 1970-1 C.B. 167
- Cross-Reference
26 CFR 1.1014-1: Basis of property acquired from a decedent.
(Also Section 72; 1.72-11.)
- LanguageEnglish
- Tax Analysts Electronic Citationnot available
Advice has been requested as to the treatment, for Federal income tax purposes, of a beneficiary's right to the accumulated value in a contract providing for a variable annuity upon the death of the contract owner prior to the starting date of the annuity.
Prior to his death the contract owner purchased a contract that provides for a variable annuity from an insurance company naming his wife as the principal beneficiary.
The contract provided that in the event of the contract owner's death prior to the commencement date of the annuity, the beneficiary (or the contract owner's estate if the beneficiary predeceases the owner) has the right to surrender the contract for the then value of the contract owner's interest in the accumulation fund of the insurance company.
The accumulation fund, which is managed by the insurance company, consists of assets purchased by the insurance company and held for the exclusive benefit of the contract holders and the beneficiaries of the contracts providing for variable annuities issued by the insurance company. The fund is registered with the Securities and Exchange Commission as a diversified open-end investment company.
The contract owner is credited at the date of purchase of the variable annuity contract with "accumulation units" which represent his proportionate interest in the accumulation fund on the basis of the current value of accumulation units as of the valuation date applicable to his payment. The accumulation units fluctuate in value as the accumulation fund fluctuates in value.
Under the terms of the annuity contract a cash redemption value upon surrender of the contract is payable to an owner-annuitant upon proper application at any time prior to the annuity starting date. The cash redemption value payable is determined by multiplying the number of accumulation units held to the credit of the contract by the current value of each accumulation unit at time of redemption.
This same value may be paid to a beneficiary in a lump sum if he or she so elects prior to the annuity starting date.
Section 1014(a) of the Internal Revenue Code of 1954 provides that the basis of property in the hands of a person acquiring the property from a decedent is the fair market value of the property at the date of the decedent's death or, if the decedent's executor so elects, at the alternate valuation date prescribed in section 2032 of the Code. Section 1014(b)(9) of the Code provides in the case of persons dying after December 31, 1953, that property acquired from the decedent by reason of death, form of ownership, or other conditions (if by reason thereof the property is required to be included in determining the value of the decedent's gross estate) shall, for purposes of section 1014(a) of the Code, be considered to have been acquired from or to have passed from the decedent. However, section 1014(b)(9)(A) provides that the foregoing shall not apply to annuities described in section 72 of the Code.
Section 1.72-2(b)(2) of the Income Tax Regulations provides, in part, that amounts subject to section 72 of the Code are considered amounts received as an annuity only in the event they are received on or after the "annuity starting date".
Since the annuitant, in the instant case, died prior to the starting date of the annuity and the value of the annuitant's right to the accumulated value under the annuity contract is includible in determining the value of the decedent's gross estate, the right that passes to the beneficiary by the reason of her surviving the decedent is, under section 1014(b)(9) of the Code, considered to have been acquired from or to have passed from the decedent.
Accordingly, it is held that the right to the accumulated value under the annuity contract would not be an annuity described in section 72 of the Code since it would not be received on or after the annuity starting date.
It is further held that the basis of the right is its fair market value at the date of the decedent's death, or, if so elected, as of the optional valuation date. If this basis is an amount equal to the amount received by the beneficiary upon the surrender of the contract, there will be under section 1001 of the Code, no gain under section 1002 of the Code upon such surrender.
- Cross-Reference
26 CFR 1.1014-1: Basis of property acquired from a decedent.
(Also Section 72; 1.72-11.)
- LanguageEnglish
- Tax Analysts Electronic Citationnot available