Friday April 19, 2024

Rev. Rul. 78-137

GiftLaw Note: Decedent owned a life insurance policy on the life of his child. At decedent's death the value of the policy was required to be included in the value of his estate. To value the policy the executor used the replacement cost of a new policy. The IRS, however, determined that the replacement value of a new policy was not correct because it did not reflect all the economic benefits of the policy that the decedent owned. In particular, the replacement value used did not have the same cash surrender value as the existing policy. The executor needed to use a comparable policy that reflects all economic benefits for valuation.

January, 1978

Valuation; insurance policy on the life of another. A single premium life insurance police owned by a decedent for many years on the life of another person may not be valued, under section 20.2031-8(a) of the regulations, by comparing the cost, at the time of decedent's death, of a similar policy of the same face amount with a lesser cash surrender value.

Advice has been requested whether a single premium life insurance policy is a "comparable contract" within the meaning of section 20.2031-8(a) of the regulations in the situation described below.

The decedent, A, purchased a 25x dollar life insurance policy on the life of A 's child, aged 10, in 1957. A owned the policy until A 's death in 1977. At A' s death, the cash surrender value of the policy was 12x dollars.

At the time of A' s death, the cost of a single premium policy with a face value of 25x dollars, issued by the company that issued the policy to A, on the life of a person, aged 30, was 11x dollars.

The executor of A' s estate contended that the replacement policy described above represented a "comparable contract" for purposes of section 20.2031-8(a) of the regulations. The policy owned by A was included in A 's gross estate with a value of 11x dollars.

Section 2033 of the Code provides that the value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death.

Section 2031(a) of the Code provides that the value of the decedent's gross estate shall be determined by including, to the extent provided for in section 2033 through section 2044 of the Code, the value at the time of the decedent's death of all property, real or personal, tangible or intangible, wherever situated.

Section 20.2031-8(a) of the regulations provides, in part:

Valuation of certain life insurance and annuity contracts. The value of a contract for the payment of an annuity, or an insurance policy on the life of a person other than the decedent, issued by a company regularly engaged in the selling of contracts of that character is established through the sale by that company of comparable contracts ... (Emphasis supplied.)

As valuation of an insurance policy through sale of comparable contracts is not readily ascertainable when, at the date of the decedent's death, the contract has been in force for some time and further premium payments are to be made, the value may be approximated by adding to the interpolated terminal reserve at the date of the decedent's death the proportionate part of the gross premium last paid before the date of the decedent's death which covers the period extending beyond that date.

In general, the replacement cost of a single premium policy will determine the value of the policy for gift tax purposes. United States v. Ryerson, 312 U.S. 260 (1941), Ct. D. 1488, 1941-1 C.B. 447. The replacement cost is based upon the single premium cost of a comparable policy. Candler v. Allen, 43 F. Supp. 435 (M.D. Ga. 1942). Generally, the estate tax and gift tax provisions are in pari materia. Sanford Estate v. Commissioner, 308 U.S. 39 (1939), Ct. D. 426, 1939-2 C.B. 340.

In order for an insurance policy to qualify as a "comparable contract" within the meaning of section 20.2031-8(a), the policy must provide the same economic benefits as the policy owned by the decedent. Candler v. Allen, above at 437. The economic benefits of a single premium life insurance policy consist of an entire bundle of rights including the right to surrender the policy, the right to retain it for investment virtues, the right to borrow the cash surrender value of the policy and the right to payment of the face amount on the death of the insured. Guggenheim v. Rasquin, 312 U.S. 254 (1941), Ct. D. 1487, 1941-1 C.B. 445; Candler v. Allen, above at 437.All of the economic benefits of the decedent's policy must be taken into consideration. To single out one economic benefit of the decedent's policy and to disregard the others is, in effect, to substitute a different property interest for the one that was owned by the decedent. Cf. Guggenheim v. Rasquin, above at 257.

Since the cash surrender value of the replacement policy is less than the cash surender value of the decedent's policy, the replacement policy does not reflect all of the economic benefits of the policy owned by the decedent. Therefore, the replacement policy is not a "comparable contract" within the meaning of section 20.2031-8(a) of the regulations. Accordingly, in the present case, the value of the policy owned by A on the life of A 's child shall be determined, for Federal estate tax purposes, by reference to a "comparable contract" that reflects all of the economic benefits of the decedent's policy. If, however, information pertaining to a "comparable contract" is not obtainable, the value of the policy shall be determined by reference to the interpolated terminal reserve value of the policy pursuant to section 20.2031-8(a)(2) of the regulations, quoted above'