rr-98-8.pdf

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Part I
Section 2519.--Dispositions of Certain Life Estates.
26 CFR 25.2519-1: Dispositions of certain life estates.
(Also sections 2044; 2056; 2511; 2512; 20.2044-1; 20.2056(b)-7;
25.2511-1; 25.2512-8)
Rev. Rul. 98-8
ISSUE
What are the gift tax consequences to the surviving spouse
of the acquisition by the surviving spouse of the remainder
interest in a trust subject to a qualified terminable interest
property (QTIP) election under § 2056(b)(7) of the Internal
Revenue Code?
FACTS
The decedent, D, died in 1993 survived by S, D's spouse.
Under the terms of D's will, a trust (the QTIP Trust) was
established under which S was to receive all of the trust income,
payable at least annually, for S's life. On S's death, the
remainder was to be distributed outright to C, D's adult child.

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S was not given a general power of appointment over the trust
property.
On the federal estate tax return filed for D’s estate, the
executor made an election under § 2056(b)(7) to treat the trust
property as QTIP, and a marital deduction was allowed to D's
estate for the value of the property passing from D to the QTIP
Trust.
Subsequently, S, C, and the trustee of the QTIP Trust
entered into the following transaction: (1) S acquired C's
remainder interest in the QTIP Trust; (2) S gave C a promissory
note in the face amount of x dollars (the value of the remainder
interest) for the remainder interest; (3) the trustee distributed
all of the QTIP Trust assets (having a value of x + y dollars) to
S; and (4) S thereupon paid x dollars from those assets to C in
satisfaction of the promissory note.
At the conclusion of the transaction, the QTIP Trust was
terminated; S held QTIP Trust assets having a value of y dollars
(which was equal to the value of S's life interest in the trust);
and C held assets having a value of x dollars (which was equal to
the value of the remainder interest in the trust). S contended
that the transaction was not subject to gift tax because S
received full and adequate consideration (the x dollar remainder
interest in the QTIP Trust) in exchange for the x dollar
promissory note given by S TO C.

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LAW AND ANALYSIS
Section 2044(a) provides that the value of the gross estate
includes the value of any property described in § 2044(b) in
which the decedent had a qualifying income interest for life.
Section 2044(b) provides that § 2044 applies to any property if a
deduction was allowed with respect to the transfer of the
property to the decedent under § 2056(b)(7).
Section 2056(a) provides that the value of the taxable
estate is, except as limited by § 2056(b), determined by
deducting from the value of the gross estate an amount equal to
the value of any interest in property that passes or has passed
from the decedent to the surviving spouse.
Under § 2056(b)(1), if an interest passing to the surviving
spouse will terminate, no deduction is allowed with respect to
such interest if, after termination of the spouse's interest, an
interest in the property passes or has passed (for less than an
adequate and full consideration in money or money's worth) from
the decedent to any person other than the surviving spouse (or
the estate of such spouse).
Section 2056(b)(7)(A) provides that qualified terminable
interest property, for purposes of § 2056(a), is treated as
passing to the surviving spouse, and no part of such property is
treated as passing to any person other than the surviving spouse.
In general, qualified terminable interest property is property in
which the spouse receives a qualifying income interest for life,

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and with respect to which the executor makes an election to treat
the property as QTIP.
Section 2511(a) provides that the gift tax applies whether
the transfer is in trust or otherwise, whether the gift is direct
or indirect, and whether the property is real or personal,
tangible or intangible.
Section 2512(b) provides that where property is transferred
for less than an adequate and full consideration in money or
money’s worth, the amount by which the value of the property
exceeds the value of the consideration is deemed a gift.
Section 2519(a) provides that any disposition of all or part
of a qualifying income interest for life in any property to which
the section applies is treated as a transfer of all interests in
the property other than the qualifying income interest. Section
2519(b) provides that the section applies to any property if a
deduction was allowed with respect to the transfer of such
property to the donor under § 2056(b)(7).
The estate tax marital deduction provisions are intended to
provide a special tax benefit that allows property to pass to the
surviving spouse without the decedent's estate paying tax on its
value. Tax is deferred on the transfer until the surviving
spouse either dies or makes a lifetime disposition of the
property. Under either circumstance, a transfer (estate or gift)
tax is paid. United States v. Stapf, 375 U.S. 118, 128 (1963),
1964-1 (Part 1) C.B. 535, 537; Estate of Clayton v. Commissioner,
976 F.2d 1486, 1491 (5th Cir. 1992); Estate of Letts v.

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Commissioner, 109 T.C. 290, (1997) ("It is a basic policy of
the marital deduction that property that passes untaxed from a
predeceasing spouse to a surviving spouse is included in the
estate of the surviving spouse.")
The statutory scheme of the QTIP provisions is consistent
with this congressional intent. Thus, a marital deduction is
allowed under § 2056(b)(7) for property passing from a decedent
to a QTIP trust in which the surviving spouse possesses a
lifetime income interest. Sections 2519 and 2044 act to defer
the taxable event on the marital deduction property only so long
as the surviving spouse continues to hold the lifetime income
interest.
Under § 2519, if a surviving spouse disposes of any part of
the qualifying income interest, the spouse is treated as making a
gift of the remainder interest in the underlying property (i.e.,
all interests in the property other than the income interest).
Correspondingly, under § 2511, the disposition of the income
interest by the spouse is treated as a gift, to the extent the
income interest is transferred to another for less than adequate
consideration.
The term "disposition," as used in § 2519, applies broadly
to circumstances in which the surviving spouse's right to receive
the income is relinquished or otherwise terminated, by whatever
means. See H. Rep. No. 201, 97th Cong., 1st Sess. 161 (1981)
that states:

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The bill provides that property subject to a [QTIP
election] will be subject to transfer taxes at the earlier
of (1) the date on which the spouse disposes (either by
gift, sale, or otherwise) of all or part of the qualifying
income interest, or (2) upon the spouse’s death.
A commutation, which is a proportionate division of trust
property between the life beneficiary and remainderman based on
the respective values of their interests is, in the context of a
QTIP trust, a taxable disposition by the spouse of the qualifying
income interest, resulting in a gift under § 2519 of the value of
the remainder interest. The commutation of the spouse's income
interest in the QTIP trust is essentially a sale of the income
interest by the spouse to the trustee (or the remainderman) in
exchange for an amount equal to the value of the income interest.
Sales and commutations are expressly characterized as
dispositions in the applicable legislative history and
regulations. Section 25.2519-1(g), Example 2 (illustrating that
the sale by the spouse of the spouse's income interest to the
trust remaindermen is a disposition of the income interest);
§ 25.2519-1(f) providing that "[T]he sale of qualified terminable
interest property, followed by the payment to the donee-spouse of
a portion of the proceeds equal to the value of the donee-
spouse's income interest, is considered a disposition of the
qualifying income interest". See also, Estate of Novotny v.
Commissioner, 93 T.C. 12 (1989), in which the surviving spouse
and remainderman divided the sale proceeds of QTIP property

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proportionately on the basis of the respective values of their
interests; the court indicated that the commutation constituted a
disposition by the spouse of the income interest for purposes of
§ 2519 and was thus subject to gift tax.
There is little distinction between the sale and commutation
transactions treated as dispositions in the regulations and the
transaction presented here, where S acquired the remainder
interest. In both cases, after the transaction the spouse's
income interest in the trust is terminated and the spouse
receives outright ownership of property having a net value equal
to the value of the spouse's income interest. Similarly, the
remainderman receives ownership of property equal in value to the
remainder interest. Thus, the transaction in the instant case
essentially effectuates a commutation of S's income interest in
the trust, a transaction that is a disposition of S's income
interest under § 2519. Therefore, under § 2519, S is regarded as
making a gift of x dollars, the value of the remainder interest
in the QTIP Trust. Section 25.2519-1(f).
This conclusion that S has made a gift is also supported by
an additional analysis. S acquired an asset (the remainder
interest in the QTIP Trust) that is already subject to inclusion
in S's transfer tax base under § 2044. In analogous situations,
the courts have recognized that the receipt of an asset that does
not effectively increase the value of the recipient's gross
estate does not constitute adequate consideration for purposes of
the gift and estate tax. See Commissioner v. Wemyss, 324 U.S.

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303, 307 (1945), 1945 C.B. 416, ("The section taxing as gifts
transfers that are not made for ‘adequate and full [money]
consideration’ aims to reach those transfers which are withdrawn
from the donor’s estate.")
A companion case to Commissioner v. Wemyss, Merrill v. Fahs,
324 U.S. 308 (1945), 1945 C.B. 418, and the cases that preceded
it, involved situations where A, an individual, transferred
property to B, A’s spouse (or future spouse), in exchange for
B’s relinquishment of marital rights in A’s property. The Court
held that B’s relinquishment of the marital rights did not
constitute adequate and full consideration for A’s transfer
because the assets subject to the marital rights were already
includible in A’s taxable estate. The property subject to dower
and marital rights is clearly included in the gross estate of the
property owner. Thus, to conclude that the relinquishment of
dower and marital rights by the spouse of the property owner
constituted adequate and full consideration for a transfer by the
property owner for gift tax purposes would effectively subvert
the legislative intent and statutory scheme of the gift tax
provisions. Merrill v. Fahs, at 311-312. See also, Commissioner
v. Bristol, 121 F.2d 129, 136 (1st Cir. 1941).
Likewise, in the present situation, property subject to the
QTIP election was intended to be subject to either gift or estate
tax. S’s receipt of the remainder interest does not increase the
value of S’s taxable estate because that property is already
subject to inclusion in S's taxable estate under § 2044. Rather,

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S’s issuance of the note results in a depletion of S’s taxable
estate that is not offset by S’s receipt of the remainder
interest. Thus, for estate and gift tax purposes, S’s receipt of
the remainder interest cannot constitute adequate and full
consideration under § 2512 for the promissory note transferred by
S to C. As was the case in Merrill v. Fahs, any other result
would subvert the legislative intent and statutory scheme
underlying § 2056(b)(7). Therefore, under § 2511, S has made a
gift to C equal to the value of the promissory note S gave to C.
In addition, a gift tax would be imposed under the above
alternative rationales even if S acquired only a portion of C's
remainder interest; e.g., S acquired 60 percent of C's remainder
interest. If, under applicable state law, such a transaction
results in a partial termination of the trust, S would be treated
as disposing of part of S's income interest in the trust, and the
commutation analysis would apply. See, e.g., Restatement
(Second) of Trusts § 340(2) (1959). See also, § 25.2519-1(g),
Example 4, (illustrating the estate and gift tax consequences of
the disposition of a portion of the spouse's income interest).
If the trust does not terminate, S would nonetheless be treated
as making a transfer under §§ 2511 and 2512 for less than
adequate and full consideration to the extent of the value of the
property or cash S transfers in exchange for the partial
remainder interest.
Further, the conclusion of this revenue ruling would be the
same if S transferred to C property or cash rather than the

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promissory note. The economic effect of the transaction is
identical, regardless whether S uses S’s own funds to finance the
transaction or gives a promissory note and discharges the note
using some of the QTIP Trust assets received in the transaction.
Thus, the result is the same for transfer tax purposes.
HOLDING
If a surviving spouse acquires the remainder interest in a
trust subject to a QTIP election under § 2056(b)(7) in connection
with the transfer by the surviving spouse of property or cash to
the holder of the remainder interest, the surviving spouse makes
a gift both under § 2519 and §§ 2511 and 2512. The amount of the
gift is equal to the greater of (i) the value of the remainder
interest (pursuant to § 2519), or (ii) the value of the property
or cash transferred to the holder of the remainder interest
(pursuant to §§ 2511 and 2512).
DRAFTING INFORMATION
The principal author of this revenue ruling is Deborah Ryan
of the office of Assistant Chief Counsel (Passthroughs and
Special Industries. For further information regarding this
revenue ruling contact Ms. Ryan on (202) 622-3090 (not a toll-
free call).