Rev. Rul. 60-87

Advice has been requested whether gain or loss is recognized upon the distribution of securities by the executor of an estate to a marital deduction testamentary trust under the circumstances described below.

The decedent was a resident of a community property state. The estate consisted almost entirely of community property. The decedent's will provided that, after certain distributions of his personal property, a part of the residue and remainder of the estate be placed in trust for the benefit of his wife. The trust was to include the wife's share of certain community property, plus an amount of the decedent's separate property which, when added to the value of certain other property included in the decedent's gross estate, would equal one-half of his adjusted gross estate as finally determined for Federal estate tax purposes. On the date the will was executed, the decedent's wife executed a statement to the effect that her election to accept its provisions would be effective upon demise of her husband upon condition that his will be admitted to probate. The will has been admitted to probate and she elected to take under it. The testamentary trust is to continue during the lifetime of the decedent's wife and during such period of time she is to receive the income therefrom, with a general testamentary power of appointment, but in default of appointment with remainder over to named persons.

After the final determination of the value of the decedent's adjusted gross estate for Federal estate tax purposes, the executor of the estate transferred to the testamentary marital deduction trust securities sufficient in value, together with the other items to be included therein, to bring the value of the trust to the required one-half of the adjusted gross estate. In determining the value of the property to be transferred to the trust, the executor of the estate used the fair market value of the property at the date of the distribution. However, since the fair market value of the property transferred, at the date of the transfer to the trust, was greater than the value used for Federal estate tax purposes, the specific question arises whether gain is realized by the estate because of such transfer. A corollary question is whether such marital deduction trust may be considered as being provided for in a fixed and definite `dollar amount.'

Revenue Ruling 56-270, C.B. 1956-1, 325, stands for the proposition that, if a marital deduction trust comprises a fraction or percentage of the `adjusted gross estate' of a decedent, the marital trust fund is considered to have been provided for in a fixed and definite `dollar amount.' Therefore, capital gain or loss is recognized upon the distribution of property to a trust.

Insofar as is here pertinent, section 663(a) of the Internal Revenue Code of 1954 provides, in general, that a gift or bequest of a specific sum of money shall neither be allowed as a deduction to an estate or trust under section 661 of the Code nor included in the gross income of the beneficiary under section 662(a) of the Code. To qualify for this exclusion, the amount of money bequeathed must be ascertainable as of the date of death. The effect of the regulations is that a bequest under a marital deduction trust formula clause does not qualify for exclusion since the amount of the trust fund is not ascertainable at the date of the decedent's death.

Section 1.663(a)-1(b)(1) of the Income Tax Regulations provides as follows:

In order to qualify as a gift or bequest of a specific sum of money or of specific property under section 663(a), the amount of money or the identity of the specific property must be ascertainable under the terms of the testator's will as of the date of his death, or under the terms of an inter vivos trust instrument as of the date of the inception of the trust. For example, bequests to a decedent's son of the decedent's interest in a partnership and to his daughter of a sum of money equal to the value of the partnership interest are bequests of specific property and of a specific sum of money, respectively. On the other hand, a bequest to the decedent's spouse of money or property, to be selected by the decedent's executor, equal in value to a fraction of the decedent's `adjusted gross estate' is neither a bequest of a specific sum of money or of specific property. The identity of the property and the amount of money specified in the preceding sentence are dependent both on the exercise of the executor's discretion and on the payment of administration expenses and other charges, neither of which are facts existing on the date of the decedent's death. It is immaterial that the value of the bequest is determinable after the decedent's death before the bequest is satisfied (so that gain or loss may be realized by the estate in the transfer of property in satisfaction of it).

Unlike section 1.663(a)-1(b)(1) of the regulations, Revenue Ruling 56-270, supra, is not concerned with the ascertainability of a specific amount at the date of death but rather whether the marital trust fund is provided for in a fixed and definite amount at the time of the distribution. Thus, to qualify for the exclusion provided for in section 663(a) of the Code, the above-quoted regulation prescribes an entirely different test from that prescribed in Revenue Ruling 56-270, which has application only for capital gain purposes. Further, the last sentence of the above-quoted regulations recognizes the fact that a different rule applies for capital gain purposes and clearly implies that the regulations are not to be considered inconsistent with that rule.

In the instant case, the marital deduction trust comprises a portion of the residue of the decedent's estate. However, instead of using a residuary formula clause, which leaves a percentage or fraction of the value of the residuary estate to the surviving spouse or trust, the will uses a pecuniary formula clause, as a Revenue Ruling 56-270, supra, which leaves a percentage of the `adjusted gross estate' to the surviving spouse or trust. There is a significant distinction between a marital deduction trust of the pecuniary formula type and one of the residuary formula type.

The rationale of Revenue Ruling 56-270, supra, is that a marital deduction trust of the pecuniary formula type provides for a trust fund in a fixed and definite amount, once the value of the adjusted gross estate is finally determined, which amount is unaffected by any appreciation or depreciation in value of the assets comprising the estate.

The difference is that under a pecuniary formula clause the trust will receive assets of a fixed and definite amount at the time of distribution, whereas under the residuary formula clause the percentage or fraction will be applied for the purpose of making distribution of the residuary estate as constituted at the time of distribution. Therefore, under a residuary formula clause, the trust will share in appreciation and depreciation of the value of the estate, which is not the cause under a pecuniary formula clause. Thus, Revenue Ruling 56-270, supra, is not inconsistent with section 1.663(a)-1(b)(1) of the regulations.

The facts in the instant case show that the marital deduction trust comprising a portion of the residue of the estate is measured by a percentage of the value of the adjusted gross estate. Under such circumstances, the marital trust fund is considered as being provided for in a fixed and definite `dollar amount.' Accordingly, gain or loss is realized by the estate measured by the difference between the fair market value of the property at the date of distribution and the value of the property determined for Federal estate tax purposes.

Revenue Ruling 56-270, C.B. 1956-1, 325, is clarified.