Rev. Rul. 75-240

Advice has been requested whether at the time of her husband's death a nonemployee surviving spouse in a community property state is subject to the gift tax imposed under section 2501 of the Internal Revenue Code of 1954, notwithstanding the provisions of section 2517 of the Code, under the circumstances described below.

The husband had been employed by a company that had established a profit-sharing retirement plan that met the requirements of section 401(a) of the Code. All contributions to the retirement plan had been made by the employer.

After the husband died, a lump sum death benefit was paid to the surviving beneficiary previously designated by the husband. The wife had never been employed by the husband's employer, knew nothing of the profit-sharing plan, and had not joined in the designation of the beneficiary. However, under the community property laws of the State, the contributions made to the plan in the name of the husband were community property. Consequently, when the husband died and the death benefit was paid to the designated beneficiary there was a completed transfer by the wife for purposes of the gift tax unless it is excluded from gifts as provided under section 2517(a) of the Code.

Section 2501 of the Code provides for the imposition of a tax on the transfer of property by gift. However, Section 2517 provides, in part, as follows:

(a) GENERAL RULE.--The exercise or nonexercise by an employee of an election or option whereby an annuity or other payment will become payable to any beneficiary at or after the employee's death shall not be considered a transfer for purposes of this chapter if the option or election and annuity or other payment is provided for under--

(1) an employees' trust (or under a contract purchased by an employees' trust) forming part of a pension, stock bonus, or profit-sharing plan which, at the time of such exercise or nonexercise, or at the time of termination of the plan if earlier, met the requirements of section 401(a); * * *

The exclusion provided under 2517(a) of the Code is applicable to situations in which the donor was an employee-participant in one of the designated "qualified plans" or a party to an annuity contract purchased by his employer. Subsection (a)(1), for example, refers to the exercise or nonexercise by an employee of an election or option. This subsection also requires that the payment payable to the beneficiary be receivable under an employee's trust forming part of a "qualified plan."

Under section 2517(a) of the Code, neither of the above requirements is satisfied in the present case. The wife was not an employee-participant in the profit-sharing plan, and, thus, the payment to the beneficiary of her community interest in the death benefit was not received by the beneficiary under an employee's trust forming part of a qualified plan within the meaning of section 2517(a)(1).

In an analogous Federal estate tax situation, it was held in Rev. Rul. 67-278, 1967-2 C.B. 323, that a decedent spouse, who was not the employee, had an interest in one-half of an annuity or plan of the surviving spouse as the result of the community property law of a State. The decedent-spouse's interest did not arise as a result of any employee relationship on the part of the decedent-spouse and, therefore, section 2039(c) of the Code was not applicable. Consequently, the community property interest possessed by the nonemployee decedent was includible in her gross estate for Federal estate tax purposes. If the decedent-spouse had died in a common law State nothing would have been includible in her gross estate.

Section 2(a) of Pub. L. 92-580 (Act of October 27, 1972, 86 Stat. 1276, 1972-2 C.B. 703) nullified Rev. Rul. 67-278 by adding section 2039(d) to the Code. This section now excludes from an employee's spouse's gross estate, if she predeceases the employee, any interest which the nonemployee spouse has by virtue of community property laws. Sections 2039(c) and 2517(a) of the Code are comparable estate and gift tax provisions. However, when Congress enacted Pub. L. 92-580 and added section 2039(d) to the Code, it did not make correlative changes to section 2517 so as to eliminate the gift tax discrimination as it did with respect to the estate tax discrimination.

Accordingly, under section 2501 of the Code, the nonemployee surviving spouse in this case is subject, at the time of her husband's death, to the gift tax by reason of the death benefit transferred to the designated beneficiary pursuant to her husband's qualified retirement plan, and the exclusion provided by section 2517(a) is not applicable.