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Friday, April 26, 2024
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GiftLaw Note:
Decedent at his death owned Series E and Series H bonds. His will provides for the residuary of his estate to be divided between four charitable beneficiaries. In his will the decedent grants the trustee the powers and authority allowed under local law to authorize non-pro-rata distributions of property to the beneficiaries. The trustee thus gives cash to charities W, X and Y and the bonds to charity Z. Because the will and local law allow the trustee to make non-pro rata distributions, the distribution of the bonds to charity Z will not be deemed a sale or exchange that would cause the estate to recognize the gain within the bonds. Thus, when Z redeems the bonds the gain will be taxable to Z. However, because Z is tax-exempt it will not recognize any of the gain.
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PRIVATE RULING 9537011
DATE: June 16, 1995
This is in response to a letter dated February 7, 1995, in which rulings are requested concerning the federal income tax treatment of the distribution of Series E and Series HH United States savings bonds to beneficiaries of D's estate.
The information submitted by your authorized representative states the following:
D died on January 27, 1994. Among the assets in D's residuary estate are Series E bonds and Series HH bonds. The Series HH bonds were acquired in exchange of Series E bonds. D and Estate use the cash receipts and disbursements method of accounting. D and Estate have not elected under section 454(a) of the Code to report the increase in redemption price of the Series E bonds each year as it accrued and no such election is contemplated.
Item Sixth of D's will directs D's residuary estate to be distributed in various fractional shares to four tax-exempt eleemosynary institutions, W, X, Y, and Z. Item Seventh of D's will grants the trustee the powers and authority set out in Chapter 110, Section 3 of State Public Acts of 1963 (State Code Annotated, Section 35-50-110).
State Code Annotated, Section 35-50-110(31) provides that the fiduciary shall be vested with the power, in making distribution of capital assets of the estate to distributees, to make such distribution in kind or in cash, or partially in kind and partially in cash, as the fiduciary finds to be most practicable and for the best interest of the distributees.
Pursuant to Item Sixth of D's will, the trustee is distributing cash to beneficiaries W, X, and Y. The trustee is distributing the Series E and Series HH bonds to Z.
Under section 454(a) of the Internal Revenue Code, an owner of Series E bonds employing the cash receipts and disbursements method of accounting who has not made the election under section 454(a), must include the increment in value in gross income in the first taxable year in which the bonds are disposed of, redeemed, or reach final maturity.
Section 691(a)(1) of the Code provides the general rule that the amount of all items of gross income in respect of a decedent which are not properly includible in respect of the taxable period in which falls the date of his death or a prior period shall be 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 such right.
Section 691(a)(2) of the Code provides that if a right, described in section 691(a)(1), to receive an amount is transferred by the estate of the decedent or a person who received such right by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent, there shall be included in the gross income of the estate or such person, as the case may be, for the taxable period in which the transfer occurs, the fair market value of such right at the time of such transfer plus the amount by which any consideration for the transfer exceeds such fair market value. For purposes of section 691(a)(2), the term "transfer" includes sale, exchange, or other disposition, or the satisfaction of an installment obligation at other than face value, but does not include transmission at death to the estate of the decedent or a transfer to a person pursuant to the right of such person to receive such amount by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent.
Section 1.691(a)-4(b)(2) of the Income Tax Regulations provides, in part, that if an estate of a decedent transfers a right to income in respect of a decedent to a residuary legatee, only the residuary legatee must include such income in gross income when received.
Section 1.661(a)-2(f) of the Regulations, in general, provides that if property is paid or distributed in kind, no gain or loss is realized by the estate (or the other beneficiaries) by reason of the distribution, unless the distribution is in satisfaction of a right to a specific dollar amount or specific property other than that distributed.
Rev. Rul. 64-104, 1964-1 C.B. 223, concludes that the unreported increment in value reflected in the redemption value of Series E bonds as of the date of decedent's death constitutes income in respect of a decedent under section 691(a) of the Code. Therefore, where the decedent and the decedent's estate have not made the section 454(a) election, the unreported increment in value of the Series E bonds still held by the decedent at the decedent's death should be returned as income for the taxable year in which the bonds are disposed of, are redeemed or have reached final maturity, whichever is earlier, by the estate or the decedent, or by the person entitled to the bonds by bequest or inheritance or by reason of the death of the decedent.
Rev. Rul. 69-486, 1969-2 C.B. 159, concludes that if a trustee is not authorized to make a non-pro rata distribution of property in kind but does so as a result of the mutual agreement of the beneficiaries, the non-pro rata distribution is equivalent to a pro rata distribution followed by an exchange between the beneficiaries.
Based on the information submitted and the representations made, we conclude as follows:
(1) The distribution of the bonds in kind to Z is not a disposition by Estate for purposes of section 691(a) of the Code.
(2) Since D's will and local law authorize the non-pro rata distribution of property to the beneficiaries, the non-pro rata distribution of the bonds by Estate will not be deemed a pro rata distribution followed by an exchange between the beneficiaries.
(3) The interest accrued on the Series E bonds and the unreported Series E interest component of the Series HH bonds, as of the date of distribution to the residuary legatees, is not includible in the gross income of Estate, provided Estate does not make the election under section 454(a) of the Code. The accrued interest as of the date of distribution and any subsequent accrual of interest will be includible in the gross income of Z in the first taxable year in which the bonds are disposed of, redeemed, or reach final maturity, assuming that Z has not made the election under section 454(a).
Except as specifically set forth above, no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the Code.
This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent.
In accordance with the power of attorney on file with this office, we are forwarding a copy of this letter to your representative.
Sincerely yours,
J. THOMAS HINES
Senior Technician Reviewer
Branch 2
Office of the Assistant
Chief Counsel
(Passthroughs and Special Industries)
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