Rev. Rul. 66-283

Advice has been requested with respect to the application of section 1014(b)(6) of the Internal Revenue Code of 1954 to the income tax basis of a surviving spouse's one-half interest in California community property which has been transferred to a revocable trust.

H and W are husband and wife and domiciliaries of the State of California. Under California community property law a husband and wife may by agreement characterize their property as community or separate. Section 158 of the California Civil Code; Mears v. Mears (1960) 4 Cal.Rptr. 618; Tomaier v. Tomaier (1944) 146 P.2d 905. Under California law, community property may also be held by a trustee without losing its character as such. Berniker v. Berniker (1947) 182 P.2d 557. In 1958 H and W executed a revocable trust and transferred to it certain property held by them as community property under the laws of California. The trust instrument provides that the property transferred to the trust shall retain its character as community property. Under the terms of the trust, H and W , as long as both are alive, may at any time alter, amend or revoke the trust in whole or in part, provided that any part of the trust estate so withdrawn shall be transferred to H and W as community property. The net income from the trust is community property, and is to be paid to or applied for the benefit of the grantors.

Upon the death of either H or W , the trust estate is to be divided into two equal shares, each to be held and administered as a separate trust. One share is to consist of the community interest of H , and the other of the community interest of W . During the lifetime of the survivor, the trustee is to pay to the survivor all of the net income from his or her share, and to pay to the survivor and another designated beneficiary the net income from the decedent's share. The trust consisting of the community interest of the decedent is to be irrevocable, but the trust consisting of the survivor's community interest may be altered, amended, or revoked by the survivor at any time.

One of the spouses died in 1965. As of the date of the decedent's death, the trust had not been altered, amended or revoked.

Section 1014(b)(6) of the Code provides, in pertinent part, that in the case of decedents dying after December 31, 1947, property which represents the surviving spouse's one-half share of community property held by the decedent and the surviving spouse under the community property laws of any State, is considered, for purposes of section 1014(a) of the Code, to have been acquired from or to have passed from the decedent if at least one-half of the whole of the community interest in such property was includible in determining the value of the decedent's gross estate under chapter 11 of subtitle B (sec. 2001 and following, relating to estate tax).

Section 676(a) of the Code, dealing with power to revoke, treats the grantor as the owner of any portion of a trust where he has at any time the power to revest in himself title to such portion. Section 671 of the Code provides, generally that where the grantor is treated as the owner of any portion of a trust under subpart E (sec. 671 and following), part I, subchapter J, chapter 1 of the Code, the items of income, deductions, and credits against tax of the trust which are attributable to that portion of the trust shall be included in computing the taxable income and credits of the grantor.

For purposes of section 1014(b)(6) of the Code, H and W are considered as continuing to own the property transferred by them to the revocable trust as their community property.

Under section 2033 of the Code the value of the gross estate includes the value of all property to the extent of the interest therein of the decedent at the time of his death.

Section 2036(a)(1) of the Code provides that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death the possession or enjoyment of, or the right to the income from, the property.

Section 2038(a)(1) of the Code provides that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time after June 22, 1936, made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of decedent's death.

In this case, one-half of the value of the community interest in the property held in the revocable trust is includible under sections 2033, 2036(a)(1), and 2038(a)(1) of the Code in determining the value of the gross estate of the first spouse to die, because both spouses had retained for their lives the right to the income from the community property held in the trust and possessed at the date of the decedent spouse's death a power to alter, amend or revoke the trust. The property which represents the surviving spouse's one-half interest in the community property held in the revocable trust is considered under section 1014(b)(6) of the Code to have been acquired from or to have passed from the decedent and, accordingly, its basis is determined under the provisions of section 1014(a) of the Code.