Rev. Rul. 77-34

Advice has been requested as to what portion of an amount credited to the account of the decedent under an employees' profit-sharing plan and trust agreement is includible in the decedent's gross estate for Federal estate tax purposes under the circumstances described below.

The decedent, at the time of death in 1977, was an employee of the M company and a participant of its profit-sharing plan and trust that met the requirements of section 401(a) of the Internal Revenue Code of 1954.

Under the provisions of the plan, an employee who has one year of service with M company is eligible to deposit up to five percent of regular monthly earnings into either of two trust funds. One fund is invested in government securities, the other in company stock. The employer contributes at least fifty cents for each dollar deposited in either fund by the employee. After six years of service an employee's right to company contributions becomes fully vested. The plan also provides that an employee may withdraw the employee's entire interest in the funds at any time. If the withdrawal is before the employee has six years of service the employee gets back only that part resulting from the employee's deposits. After six years of service, the employee also gets back that part resulting from company contributions, other than company contributions (and earnings thereon) made less than two years prior to the date of withdrawal. When such a withdrawal is made, the employee incurs a twelve-months' suspension from participation under the plan, at the expiration of which the employee may reenter. During the period of suspension, no contributions are made by the company on behalf of such employee. Upon retirement, death, or total and permanent disability, the employee's entire interest, including company contributions, is payable to the employee or the employee's beneficiary.

The decedent, who had been a participant in the plan for twenty years died while still employed, having made no request for withdrawal. The entire amount credited to the decedent's account was payable to the designated beneficiary in several payments over a period of years.

The specific question to be resolved is whether the decedent's beneficiary received the decedent's share of the plan under the terms of the plan, or from the decedent who constructively received the payments prior to death.

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) 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) of the Code, 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.

For the purposes of the income tax, Rev. Rul. 54-265, 1954-2 C.B. 239, holds that the amount placed to an employee's credit in a trust fund forming part of an employees' profit-sharing plan becomes available to the employee at the time when the employee first acquires an unrestricted right to withdraw such amount. Conditions upon such withdrawal that are without substance, however, are not deemed to prevent the participant's interest from being made available. Thus, for the doctrine of constructive receipt to apply, there must be no substantial conditions or restrictions on the right to possession. See section 1.451-2 of the Income Tax Regulations; Rev. Rul. 55-423, 1955-1 C.B. 41.

Where, under an employees' profit-sharing plan and trust, participants of a stated length of time are permitted to withdraw employer contributions to the trust, subject to the suspension of participation for a specified period during which no contributions are made by the employer on behalf of such employees, such suspension represents a substantial restriction or limitation and the amounts that are permitted to be withdrawn are not made available to the employee within the purview of section 402(a) of the Code and the regulations thereunder. Rev. Rul. 58-230, 1958-1 C.B. 204

As pointed out in Estate of Harold S. Brooks, 50 T.C. 585 (1968), acq., 1969-1 C.B. 20, where the court had for decision the question whether any part of decedent's interest in a profit-sharing trust was includible in the gross estate under section 2033 or section 2039(a) and (b) of the Code, or excludable under section 2039(c):

The doctrine of constructive receipt has been shaped largely by the courts, although it is now defined by the Income Tax Regulations. See sec. 1-451-2, Income Tax Regs. Its essence is that funds which are subject to a taxpayer's unfettered command and which he is free to enjoy at his option are constructively received by him whether he sees fit to enjoy them or not. Corliss v. Bowers, 281 U.S. 376 (1930); Ralph E. Wilson, 40 T.C. 543, 548 (1963). But constructive receipt does not occur where the taxpayer's control of the funds is subject to substantial limitations or restrictions not imposed by the taxpayer himself. Avery v. Commissioner, 292 U.S. 210 (1934); Commissioner v. Oates, 207 F. 2d 711 (C.A. 7, 1953), affirming 18 T.C. 570 (1952). * * *

Accordingly, following the rationale of Rev. Rul. 58-230 for Federal estate tax purposes, the decedent's interest in the employee trust was not constructively received prior to death and the value of such interest is not includible in the gross estate under section 2033 of the Code. The amount credited to decedent's account was receivable in several payments over a period of years by the designated beneficiary under the terms of the qualified plan. Therefore, the proportionate value of the amount receivable that is attributable to the contributions of M company is excludable from the gross estate under section 2039(c).