918 / What property is “included property” for purposes of the alternative valuation method for determining federal estate tax? What property is excluded?

Property earned or accrued (whether received or not) after the date of the decedent’s death and during the alternate valuation period with respect to property included in the gross estate is excluded in valuing the gross estate under the alternate valuation method, and is referred to as “excluded property.”¹

Thus, as to interest-bearing obligations included in the gross estate (“included property”), interest accrued after the date of death and before the subsequent valuation date constitutes “excluded property.” However, any partial payment of principal made between the date of death and the subsequent valuation date, or any advance payment of interest for a period after the subsequent valuation date made during the alternate valuation period which has the effect of reducing the value of the principal obligation as of the subsequent valuation date, will be included in the gross estate, and valued as of the date of such payment.²

The same principles applicable to interest-bearing obligations also apply to leased realty or personalty which is included in the gross estate and with respect to which an obligation to pay rent has been reserved. Both the realty or personalty itself and the rents accrued to the date of death constitute “included property,” and each is to be separately valued as of the applicable valuation date. Any rent accrued after the date of death and before the subsequent valuation date is “excluded property.” Similarly, the principle applicable with respect to interest paid in advance is equally applicable with respect to advance payments of rent.³

Assets sold continue as included property “even though they change in form.”⁴ Where royalty and working interests in oil and gas property were included property, the proceeds from the sale of oil and gas extracted from this property between the date of the decedent’s death and the alternate valuation date were held to be included property (merely the translation of the decedent’s interest in the in-place reserves the decedent owned at the time of her death into cash). As for the portion of proceeds to be included in the gross estate, the appropriate value was held to be the in-place value of the oil and gas on the date of its severance.⁵

In the case of noninterest-bearing obligations sold at a discount, such as savings bonds, the principal obligation and the discount amortized to the date of death are property interests existing at the date of death and constitute “included property.” The obligation itself is to be valued at the subsequent valuation date without regard to any further increase in value due to amortized discount. The additional discount amortized after death and during the alternate valuation period is the equivalent of interest accruing during that period and is, therefore, not to be included in the gross estate under the alternate valuation method.⁶

Shares of stock in a corporation and dividends declared to stockholders of record on or before the date of the decedent’s death and not collected at the date of death constitute “included property” of the estate. On the other hand, ordinary dividends out of earnings and profits (whether in cash, shares of the corporation, or other property) declared to stockholders of record after the date of the decedent’s death are “excluded property” and are not to be valued under the alternate valuation method. If, however, dividends are declared to stockholders of record after the date of the decedent’s death with the effect that the shares of stock at the subsequent valuation date do not reasonably represent the same “included property” of the gross estate as existed at the date of the decedent’s death, the dividends are “included property,” except to the extent that they are paid out of earnings of the corporation after the date of the decedent’s death.

For example, if a corporation makes a distribution in partial liquidation to stockholders of record during the alternate valuation period which is not accompanied by a surrender of a stock certificate for cancellation, the amount of the distribution received on stock included in the gross estate is itself “included property,” except to the extent that the distribution was out of earnings and profits since the date of the decedent’s death. Similarly, if a corporation, in which the decedent owned a substantial interest and which possessed at the date of the decedent’s death accumulated earnings and profits equal to its paid-in capital, distributed all of its accumulated earnings and profits as a cash dividend to shareholders of record during the alternate valuation period, the amount of the dividends received on stock includable in the gross estate will be included in the gross estate under the alternate valuation method. Likewise, a stock dividend distributed under such circumstances is “included property.”⁷

“Included property” also includes the following:

(1)     nontaxable stock rights and proceeds from the sale of such rights occurring after the decedent’s death but before the alternate valuation date, where the rights are issued subsequent to the decedent’s death in respect of stock owned by the decedent at death;

(2)     a nontaxable stock dividend received subsequent to the decedent’s death but before the alternate valuation date; and

(3)     payments on the principal of mortgages received between the date of death and the alternate valuation date.⁸

But where an estate owned mutual fund shares, and between the date of the decedent’s death and the alternate valuation date capital gains dividends attributable solely to gains on stocks held by the companies at decedent’s death were declared and paid, it was held that the dividends were not “included property.”⁹

When determining the value of a decedent’s gross estate, dividends declared before death, on stock includable in the gross estate, payable to stockholders of record after the date of the decedent’s death, must be considered in making an adjustment in the ex-dividend quotation of the stock at the date of the decedent’s death. Such dividends may not be included in the gross estate under the alternate method of valuing the gross estate either as a separate asset or as an adjustment of the ex-dividend quoted value of the stock as of the alternate valuation date or as of some intermediate date.

Under the alternate method of valuing the gross estate, stock includable in the gross estate and selling ex-dividend is to be valued at its ex-dividend quoted selling price as of the alternate valuation date or at any intermediate valuation date, increased by the amount of dividends declared on the stock during the alternate valuation period payable to stockholders of record subsequent to the alternate valuation date or such intermediate date. No part of the value so determined is deemed to be excluded property in determining the value of the gross estate.¹⁰