rr-05-30.pdf

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Part I
Section 691.⎯Recipients of Income in Respect of Decedents

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

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

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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)

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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

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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 of § 1014, the contract is
an annuity described in § 72 (as then in effect), and therefore receives no basis
adjustment by reason of the owner’s death because it is governed by the annuity
exception of § 1014(b)(9)(A). If the beneficiary elects a lump-sum payment, the excess
of the amount received over the amount of consideration paid by the decedent is
includable in the beneficiary’s gross income. Rev. Rul. 79-335 prospectively revokes
Rev. Rul. 70-143, 1970-1 C.B. 167, which had concluded on substantially identical facts
that such a contract, if surrendered by the beneficiary prior to the annuity starting date,
is not an annuity described in § 72 and therefore is not governed by the rule of §
1014(b)(9)(A), and that the beneficiary receives the date of death value as the basis in
the contract.
Although Rev. Rul. 79-335 concludes that the annuity exception in §
1014(b)(9)(A) applies to the contract described in that ruling, it does not specifically

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address whether amounts received by a beneficiary under a deferred annuity contract in
excess of the owner-annuitant’s investment in the contract would be subject to §§ 691
and 1014(c). However, had the owner-annuitant surrendered the contract and received
the amounts in excess of the owner-annuitant’s investment in the contract, those
amounts would have been income to the owner-annuitant under § 72(e). Because
those amounts would have been income to the owner-annuitant if the contract had been
surrendered during life, those amounts are IRD under § 691.
Likewise, in the present case, had A surrendered the contract and received the
amounts at issue, those amounts would have been income to A under § 72(e) to the
extent they exceeded A’s investment in the contract. Accordingly, amounts that B
receives that exceed A’s investment in the contract are IRD under § 691(a). As
provided in Rev. Rul. 79-335, those amounts are includible in B’s gross income and B
does not receive a basis adjustment in the contract. However, B will be entitled to a
deduction under § 691(c) if estate tax was due by reason of A’s death. The result would
be the same whether B receives the death benefit in a lump sum or as periodic
payments.
HOLDING
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,
the amount received by the beneficiary in a lump sum in excess of the owner-
annuitant’s investment in the contract is includible in the beneficiary’s gross income as
IRD within the meaning of § 691. If the death benefit is instead received in the form of a
series of periodic payments in accordance with § 72(s), the amounts received are

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likewise includible in the beneficiary’s gross income (in an amount determined under §
72) as IRD within the meaning of § 691.
EFFECT ON OTHER DOCUMENTS
Rev. Rul. 79-335 is modified and superseded for deferred annuity contracts
purchased on or after October 21, 1979. The holding of Rev. Rul. 70-143 (which was
revoked by Rev. Rul. 79-335) will continue to apply for deferred annuity contracts
purchased before October 21, 1979, including any contributions applied to those
contracts pursuant to a binding commitment entered into before that date.
DRAFTING INFORMATION
The principal author of this revenue ruling is Bradford R. Poston of the Office of
Associate Chief Counsel (Passthroughs & Special Industries). For further information
regarding this revenue ruling, contact Bradford R. Poston at (202) 622-3060 (not a toll-
free call).