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Friday, April 19, 2024
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GiftLaw Pro |
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GiftLaw Note:
Decedent owned Series E and Series H bonds at her death. Her will directed that the residuary of her estate be distributed to several charities. The personal representative, in the will, is given the power to sell any assets and to execute and deliver all conveyances. He is also given the power to distribute assets in kind. The personal representative decided to distribute the Series E and HH bonds pro rata to the charities listed in the will. The IRS in this PLR held that the distribution was not deemed to be a sale or exchange and thus, the estate would not recognize the gain within the bonds. The gain would be taxable to the charities, however, because the charities are tax-exempt they would not owe any taxes.
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This is in response to your letter dated April 1, 1998, written on behalf of Estate, 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 residuary beneficiaries of Estate.
The information submitted states the following:
D died on March 11, 1997. At the time of death, D was a resident of State. D executed a Last Will and Testament on September 26, 1988, and a subsequent Codicil dated September 27, 1996 (together the "Will"). The Will was admitted to probate and Letters of Administration were issued to P on April 4, 1997, by the C Circuit Court.
The Will contains various pre-residuary bequests of property. Article III, Paragraph B of the Will directs the distribution of D's residuary estate in various percentages to V, W, X, Y, and Z. P represents that V, W, X, Y , and Z are tax-exempt organizations under section 501(c)(3) of the Internal Revenue Code.
Article IV of the Will provides the Personal Representative with the power to sell any assets and to execute and deliver all conveyances. In addition, pursuant to Section x, State Statutes, the Personal Representative is vested with the power to distribute assets in kind.
Among the assets in D's residuary estate are Series E bonds and Series HH bonds. At the time of D's death, the Series HH bonds and the Series E bonds had not been redeemed, and had accrued reportable interest of approximately.
The Estate uses the cash receipts and disbursements method of accounting and has a taxable year ending February 28. D and Estate have not elected under section 454(a) of the Code to report the increase in redemption price of the bonds each year as it accrued and no such election is contemplated.
Pursuant to Articles III and IV of D's will, P intends to distribute the Series E and Series HH bonds pro rata to V, W, X, Y, and Z.
Under section 454(a) of the 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.
Based on the information submitted and the representations made, we conclude as follows:
(1) The distribution of the bonds in kind to V, W, X, Y, and Z is not a transfer by Estate for purposes of section 691(a)(2) of the Code and will not result in the recognition of income by Estate.
(2) The accrued interest attributable to the bonds as of the date of distribution to V, W, X, Y, and Z will be includible in the gross income of V, W, X, Y, and Z in the first taxable year in which the bonds are disposed of, redeemed, or reach final maturity assuming that no election under section 454(a) of the Code is made. In addition, the accrued interest will be exempt from tax when it is recognized by V, W, X, Y, and Z assuming that V, W, X, Y, and Z are tax-exempt organizations under section 501(c)(3).
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 the taxpayer and to the taxpayer's authorized 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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