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Rev. Rul. 78-26, 1978-1 CB 286, (Jan. 01, 1978)

REV-RUL, Timber rights; retained interest.,

Section 2036.--Transfers with Retained Life Estate

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

[IRS Headnote] Timber rights; retained interest.--
The entire value of forest land given to an individual by a decedent who reserved for ten years all timber rights, which constitute personal property under the law of the state in which the timber is located, and died during the ten-year period without having removed any timber is includible in the decedent's gross estate.

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.

The decedent was the owner of 1000 acres of forest land in State X. In 1971 the decedent made a gift of the land to A. The deed of conveyance reserved all timber rights to the decedent for ten years. These rights included, among other things, the rights to enter the land to harvest the timber, and to mill and store cut timber on the land.

Under the law of State X, all standing timber, and cutting rights with respect thereto, are considered personal property when owned by anyone other than the owner of the land, provided that the right to cut and remove the timber does not exceed ten years.

The decedent died in 1975. None of the timber had been removed from the land by that date. Although A had the right to use the land as long as such use did not interfere with the timber interest, this right had no present value at the time of the decedent's death. The question presented is whether the value of the land, in addition to the timber, is includible in the decedent's gross estate.

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.

Section 20.2036-1(a) of the Estate Tax Regulations provides that, if the decedent reserved an interest or right with respect to all of the property transferred by the decedent, the amount to be included in the gross estate is the entire value of the property.

State law, which may define the legal interests of the parties, does not limit the reach of section 2036. For example, in Estate of McNichol v. Commissioner, 265 F. 2d 667 (3d Cir. 1959), cert. den., 361 U.S. 829, a father transferred realty to his children in fee simple absolute, but had an oral understanding that he could use the land for life. The entire value of the realty was held includible in the father's estate even though the oral agreement was unenforceable under state law. It is not whether the state's property law recognizes a retained interest that will determine whether the property is includible in the gross estate under section 2036, but the fact that a decedent actually retains enjoyment of property for life.

In Estate of Nicol v. Commissioner, 56 T.C. 179 (1971), the decedent conveyed a farm to her children and retained a one-third interest in all the crops for a period which did not end before the death. Although state law provided that the retained interest was not an interest in the underlying real estate, the entire value of the property was included in the decedent's gross estate. The Tax Court found that the one-third interest equalled the rent normally charged for the farm. Thus, the decedent had retained, in effect, the rental income from the farm.

Similarly, in the present case, the decedent's reservation of the timber rights is a retention of the right to the income producing potential of the land. The state law separating the interest in the timber from that in the land is not controlling but rather the right to harvest all the trees and mill the timber is controlling. These rights extended over the entire tract. Therefore, the decedent had the right to all the income and use of the land for a period that did not end before death.

Accordingly, the entire value of the 1000 acres of forest land is includible in the decedent's gross estate.