Rev. Rul. 77-139

Advice has been requested whether, under the circumstances described below, the exclusion allowable under section 2039(c) of the Internal Revenue Code of 1954 applies to the decedent's interest in a pension plan qualified under section 401(a) of the Code.

The decedent at the time of death on January 2, 1977 was president and sole shareholder of X Corporation. The decedent was a participant in the corporation's noncontributory pension plan and, pursuant to the provisions of the plan, the decedent's spouse was designated beneficiary of a life annuity. The plan was qualified under section 401(a) of the Code and the related trust was exempt from Federal income tax under section 501(a).

Under the terms of the plan, the corporation reserved the right to terminate the plan at any time. The plan contains the provisions which satisfy the requirements of section 1.401-4(c) of the Income Tax Regulations relating to the restrictions on the payment of benefits to individuals who are among the 25 highest paid employees of the employer.

Under the laws of the state of incorporation (and the bylaws of the corporation) a majority of a corporation's stockholders may cause a dissolution of the corporation at any time, contrary to the wishes of the minority shareholders, so long as they act in good faith.

Section 2033 of the Code and the regulations thereunder provide that the gross estate of a decedent includes the value of all property beneficially owned by the decedent at the time of death.

Section 2039(a) and (b) of the Code provides that a decedent's gross estate includes the value of an annuity or other payment receivable by any beneficiary by reason of surviving the decedent, under certain contracts or agreements, to the extent that the value of the annuity or other payment is attributable to contributions made by the decedent or decedent's employer. However, section 2039(c), as amended by the Tax Reform Act of 1976, provides in part: Notwithstanding the provisions of this section or of any provision of law, there shall be excluded from the gross estate the value of an annuity or other payment [other than a lump sum distribution] receivable by any beneficiary (other than the executor) 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 the decedent's separation from employment (whether by death or otherwise), or at the time of termination of the plan if earlier, met the requirements of section 401(a). * * *

Section 2039(c) further provides that, if the amounts payable after the death of the decedent are attributable to any extent to contributions made by the decedent, no exclusion is allowable for the proportionate value of such payments.

The question presented is whether the decedent's sole ownership of X Corporation gave the decedent the unrestricted right to receive the decedent's interest in a qualified pension plan necessary for application of the constructive receipt doctrine or whether the decedent's beneficiary received such interest under the terms of the plan in satisfaction of the requirements of section 2039(c) of the Code.

Section 20.2039-2(b), Example 4, of the Estate Tax Regulations indicates that if an employee is considered as having constructively received the amount credited to the employee's account under a qualified plan, such amount is not considered as receivable by the designated beneficiary under the plan and the exclusion under section 2039(c) of the Code is not applicable. See Northern Trust Co. v. United States, 389 F. 2d 731 (7th Cir. 1968); First Trust Co. v. United States, 321 F. Supp. 1025 (D.C. Minn. 1970); Estate of Harold S. Brooks, 50 T.C. 585 (1968), acq., 1969-1 C.B. 20; Rev. Rul. 67-37, 1967-1 C.B. 271.

For purposes of the federal income tax, an amount placed to an employee's credit in a trust forming part of a qualified employees' profit-sharing plan becomes available to the employee, and includible in the employee's gross income, at the time when the employee first acquires an unrestricted right to withdraw such amount. Rev. Rul. 54-265, 1954-2 C.B. 239. But if there is a substantial restriction or limitation, under the terms of the qualified plan, on the employee's right to withdraw employer contributions to the trust, such as suspension of participation for a specified period during which no contributions are made by the employer on behalf of the employee, then the amounts which are permitted to be withdrawn are not made available to the employee. Rev. Rul. 58-230, 1958-1 C.B. 204.

Rev. Rul. 77-34, page 276, this Bulletin, holds that the rationale of Revenue Ruling 58-230 applies for purposes of the estate tax, as well as for the income tax.

A qualified plan is required to be a permanent as distinguished from a temporary program. Section 1.401-1(b)(2) of the Income Tax Regulations. If a plan is abandoned without a valid reason, the Service would retroactively disqualify the plan as not being a permanent plan for the exclusive benefit of employees in general. See Rev. Rul. 69-24, 1969-1 C.B. 110. Furthermore, if an employer abandons a plan within a few years after its adoption for any cause other than business necessity, it is presumed that the employer did not intend the plan as a permanent program from the beginning. In the absence of evidence rebutting this presumption, the plan would be revoked retroactively. Rev. Rul. 69-25, 1969-1 C.B. 113.

If a qualified plan of a corporation with one shareholder, such as the decedent's corporate plan, is terminated before the retirement or death of the participant shareholder, the corporation must establish that abandonment of the plan is due to reasons which justify not having the plan's qualification revoked retroactively. The risk of having the qualification of a plan, such as the one under consideration, revoked retroactively if such plan is terminated prematurely is substantial because the trustee must notify the District Director of the termination of the plan before making distribution of the assets of the trust. Rev. Rul. 69-252, 1969-1 C.B. 128. Section 6057(b)(3) of the Code, added by section 1031(a) of the Employee Retirement Income Security Act of 1974, P.L. 93-406, and effective for plan years beginning after December 31, 1975, requires the plan administrator to notify the Secretary or the Secretary's delegate of the termination of the plan. Thus, the de facto power of the decedent to terminate the plan was sufficiently restricted to prevent invocation of the doctrine of constructive receipt.

In addition, mere stock ownership by a plan participant is insufficient to invoke the doctrine of constructive receipt. First Trust Co. v. United States, 321 F. Supp. 1025 (D.C. Minn. 1970); Commerce Union Bank v. United States, 76-2 U.S.T.C. 8944 (M.D. Tenn. 1976); see Byrum v. United States, 408 U.S. 125 (1972), 1972-2 C.B. 518.

Accordingly, the interest of the decedent in X Corporation's qualified pension plan was not constructively received prior to death and such interest is not includible in the decedent's gross estate under section 2033 of the Code. The decedent's interest in the plan is includible in the gross estate under section 2039(a) and, since the decedent's interest was receivable by the beneficiary under the terms of the plan, the exclusionary provisions of section 2039(c) apply.