Section 691.—Recipients of Income in Respect of Decedents

26 CFR 1.691(a)–1: Income in respect of a decedent. (Also §§ 72, 1014.)

Deferred annuity contract. This ruling addresses the treatment of certain amounts received under a deferred annuity contract as income in respect of a decedent (IRD) under section 691 of the Code. Rev. Rul. 79–335 modified and superseded.

Rev. Rul. 2005–30

ISSUE

If the owner-annuitant of a deferred annuity contract dies before the annuity starting date, and the beneficiary receives a death benefit under the annuity contract (either in a lump sum or as periodic payments), is the amount received by the beneficiary in excess of the owner-annuitant’s investment in the contract includible in the beneficiary’s gross income as income in respect of a decedent (IRD) within the meaning of § 691 of the Internal Revenue Code?

FACTS

A purchased a deferred annuity contract providing for annuity payments to A beginning as of a date specified in the annuity contract. A named B as beneficiary of the contract. The contract provides that A may surrender the contract during A ’s life for its account value as determined by the formula provided under the contract. The contract further provides that if A dies before the annuity starting date, B will receive a death benefit equal to the account

value as determined by the formula provided under the contract. At B ’s election, the death benefit will be paid either in a lump sum or as periodic payments consistent with the provisions of § 72(s).

A dies before the annuity starting date and B receives the death benefit under the contract, which exceeds A ’s investment in the contract.

LAW AND ANALYSIS

Section 72(a) provides that gross income includes any amount received as an annuity. Sections 72(b) through (d) provide rules for determining what portion of an annuity payment represents a non-taxable return of investment. Section 72(e) provides rules for amounts received under an annuity contract, but not received as an annuity (and therefore not described in § 72(b) through (d)). Specifically, amounts received before the annuity starting date are generally includible in gross income to the extent allocable to the income on the annuity contract. Section 72(s) provides rules regarding the period in which an interest in an annuity contract must be distributed after the holder’s death in order for the contract to qualify as an annuity contract within the meaning of § 72.

Section 691(a)(1) provides that the amount of all items of gross IRD that are not properly includible in respect of the taxable period in which falls the date of the decedent’s death or a prior period (including the amount of all items of gross income in respect of a prior decedent, if the right to receive the amount was acquired by reason of the death of the prior decedent or by bequest, devise, or inheritance from the prior decedent) is included in the gross income, for the taxable year when received, of: (A) the estate of the decedent, if the right to receive the amount is acquired by the decedent’s estate from the decedent; (B) the person who, by reason of the death of the decedent, acquires the right to receive the amount, if the right to receive the amount is not acquired by the decedent’s estate from the decedent; or (C) the person who acquires from the decedent the right to receive the amount by bequest, devise, or inheritance, if the

amount is received after a distribution by the decedent’s estate of the right.

Section 691(c)(1) provides that a person who includes an amount of IRD in gross income under § 691(a) is allowed as a deduction, for the same taxable year, a portion of the estate tax paid by reason of the inclusion of that IRD in the decedent’s gross estate. Generally, the amount of the deduction is calculated using estate tax values, and is the amount that bears the same ratio to the estate tax attributable to the net value of all IRD items included in the decedent’s gross estate as the value of the IRD included in that person’s gross income for that taxable year bears to the value of all IRD items included in the decedent’s gross estate.

Section 1014(a)(1) provides that the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent generally is the fair market value of the property at the date of the decedent’s death. This rule does not apply if the property is sold, exchanged, or otherwise disposed of before the decedent’s death by the person.

Section 1014(b)(9) provides that, for purposes of § 1014(a), 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 for estate tax purposes, is considered to have been acquired from, or to have passed from, the decedent.

Section 1014(b)(9)(A) provides that § 1014(b)(9) does not apply to annuities described in § 72.

Section 1014(c) provides that § 1014 does not apply to property that constitutes a right to receive an item of IRD under § 691.

Rev. Rul. 79–335, 1979–2 C.B. 292, addresses a situation in which the owner-annuitant purchases a deferred variable annuity contract that provides that if the owner dies prior to the annuity starting date, the named beneficiary may elect to receive the present accumulated value of the contract either in the form of an annuity or a lump-sum payment. Rev. Rul. 79–335 concludes that, for purposes

2005–20 I.R.B. 1015 May 16, 2005