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Rev. Rul. 77-193, 1977-1 CB 273

REV-RUL, Timberland; conveyances of cutting rights and title to different persons., Rev. Rul. 77-193, 1977-1 CB 273, (Jan.01, 1977)

Section 2036.--Transfers With Retained Life Estate

26 CFR 20.2036-1: Transfers with retained life estate.

[IRS Headnote] Timberland; conveyances of cutting rights and title to different persons.--
No part of the value of land is includible in the gross estate of a taxpayer who conveyed timber rights for five years to one person for cash and four unsecured promissory notes payable on the anniversary dates of the sale, sold the land to another person a month later, and died with 23 months remaining under the conveyance of timber rights with one note unpaid.

Advice has been requested whether, under the circumstances described below, the value of certain real property is includible in a decedent's gross estate under section 2036 of the Internal Revenue Code of 1954.

In 1971, A, the owner in fee simple absolute of 1800 acres of land in State X, conveyed to B for a term of five years all of the merchantable timber on the land plus the right to enter the land for the purpose of cutting the trees and the right to erect mills for on-site processing of the felled timber. B paid A $40,000 in cash at the time of the conveyance and executed four unsecured promissory notes, each with a face value of $40,000, payable on the anniversary date of the sale in 1972, 1973, 1974 and 1975. One month following the conveyance of the timber rights to B, A by warranty deed conveyed to C the fee simple title to the 1800 acres subject to the prior conveyance to B. When A died in 1974, more than three years after these conveyances, 23 months remained on B's rights under the 1971 conveyance and one promissory note had not yet reached maturity.

Section 2036 of the Code provides:

(a) General Rule.--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--

(1) the possession or enjoyment of, or the right to the income from, the property, or

(2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.

When A conveyed the timber rights to B for a five year term, A retained a reversion in the timber which would ripen into a possessory right upon the expiration of B's five year term. When A conveyed the fee simple title to C, the reversion vested in C, leaving A with no interest or estate in the 1800 acres of land. Therefore, at the time of death, A did not possess "the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom," and the transferred property is not includible in A's gross estate under section 2036(a)(2) of the Code.

In addition, since B's promise to pay for the timber rights is a personal obligation of B as transferee, the obligation is not chargeable to the transferred property, and the payments are wholly independent of whether or not the transferred property produces income for the transferee. Thus, no part of the transferred property is includible in the transferor's gross estate under section 2036(a)(1) of the Code. See the following footnote in Fidelity-Philadelphia Trust Co. v. Smith, 356 U. S. 274, 280 (1958), 1958-1 C.B. 557, 559:

Where a decedent, not in contemplation of death, has transferred property to another in return for a promise to make periodic payments to the transferor for his lifetime, it has been held that these payments are not income from the transferred property so as to include the property in the estate of the decedent. E.g., Estate of Sarah A. Bergan, 1 T.C. 543, Acq., 1943 Cum. Bull. 2; Security Trust & Savings Bank, Trustee, 11 B.T.A. 833; Seymour Johnson, 10 B.T.A. 411; Hirsh v. United States, 1929, 35 F. 2d 982, 68 Ct. Cl. 508; cf. Welch v. Hall, 1 Cir. 134 F. 2d 366. In these cases the promise is a personal obligation of the transferee, the obligation is usually not chargeable to the transferred property, and the size of the payments is not determined by the size of the actual income from the transferred property at the time the payments are made.

Accordingly, it is held that section 2036 of the Code does not apply to the transaction under which A conveyed timber rights to B for a term of years in exchange for a cash payment and promissory notes, not all of which had reached maturity at the time of A's death, and A subsequently conveyed all of his interest and estate in the land to C.