307 N.Y. 100 | NY | 1954
In this appraisal proceeding under the New York estate tax law, both the executrix and the State Tax Commission appeal here from a nonunanimous modification, by the Appellate Division, of the Surrogate’s taxing order. The deceased, Herman K. Endemann, who died on November 4, 1947, had been, until his retirement on October 1, 1936, in the employ of New York City and a member of the city’s employees’ retirement system. On his retirement, Endemann (who, if he had not selected an “ Option ”, would have been entitled to an annual retirement allowance for his own life of $3,747.69) had, pursuant to the statute which is now section B3-46.0 of the New York City Administrative Code, made an irrevocable election of ‘ ‘ Option 3 ” of the available retirement benefits, which option provided him (then sixty-four years old) with an annual retirement allow
When decedent died, his executrix filed a New York estate tax report in wMch she valued the retirement benefits at “ 0 ”. The appraiser, however, and the Surrogate in his pro forma taxing order, included in the gross estate for tax purposes, as a transfer taking effect at decedent’s death, the widow’s annuity from the retirement system, valuing it at $8,572 in accordance with a certificate of valuation thereof made by the Superintendent of Insurance for the tax appraiser, under section 249-v of the Tax Law. That $8,572 represented, according to the appropriate tables, the calculated present value as of decedent’s death, of a life annuity to the widow, then seventy-three years old, of $1,570.20 per year. It is not disputed that $8,572 is the mathematically correct figure, if it was correct to value this annuity by that ‘ ‘ present value as of death of a future annual payment ’ ’ method. However, as we shall see, the Appellate Division majority held (incorrectly, we hold) that the value of the widow’s annuity, both at the time of its creation (decedent’s retirement) and at the time of decedent’s death, was the same: $5,514.44. As pointed out above, the 11 initial reserve ” for decedent’s retirement payments was, at his retirement, $34,183.04; he elected to take for himself an annual retirement allowance of I $3,140.60; since, reasoned the Appellate Division, the initial reserve of $34,183.04 would have produced a single life annuity! for Endemann of $3,747.69 and did produce, as optioned, an I annuity for him of $3,140.60 and a survivor’s annuity of I $1,570.20, the value or cost of Endemann’s optioned annuity was!
Because the pro forma order had included this annuity in the tax estate at $8,572, the executrix appealed therefrom to the Surrogate, who modified the pro forma order by excluding therefrom any value for the widow’s annuity. The Surrogate wrote two opinions in which he held in substance that the annuity was not taxable at all because of section 5 of article XVI of the State Constitution, which is as follows: " All salaries, wages and other compensation, except pensions, paid to officers and employees of the state and its subdivisions and agencies shall be subject to taxation The Surrogate agreed with the appraiser that the selection by the testator of option 3 (giving his wife an annuity after his death) was, under subdivision 3 of section 249-r of the Tax Law, " a transfer * * * intended to take effect in possession or enjoyment at or after his death ”, and as to this all the Appellate Division Justices agreed, except one dissenter whose view was that “ at the time of his death decedent had no property in this fund and that he had at no time made a transfer of any interest in the fund ”. In other words, the Surrogate held that this was an otherwise taxable to-take-effect-at-death transfer, but that the State Constitution forbade its taxation since it was a “ pension ”. Four of the Appellate Division Justices held that the Constitution had no such meaning or effect and that the annuity was taxable, but one of those four upheld the appraiser’s method of valuation, and the three other Justices used a different kind of mathematics. The other dissenting Justice, at the Appellate Division, saw no unconstitutionality in the taxing, but thought that there was no transfer to the wife by decedent, effective at his death.
1. Does the State Constitution forbid taxing this annuity? (We answer: “ no ”.)
2. Did decedent’s choice of option 3 constitute a transfer to his wife intended to take effect at his death? (We answer: “ yes ”.)
3. Did the Appellate Division majority, or the appraiser, use the correct method of valuing the widow’s annuity? (We answer: “ the appraiser ”.)
First, as to the constitutional question: when the 1938 Constitutional Convention enacted section 5 of article XVI (supra), making subject to taxation “ all salaries, wages and other compensation, except pensions, paid to officers and employees ”, it was putting into the Constitution the already existing statutory law that public officers and employees, like everyone else, had to pay taxes on their earnings, that is, income tax. This is clearly shown by the excerpts from the convention journal (II New York State Constitutional Convention of 1938, Revised Record, pp. 1119, 1120) quoted by the Surrogate. As originally introduced, the new constitutional provision referred to ££ Salaries, wages and other compensation ” but the word ££ pensions ” was added, out of caution, to make sure that it could not be construed to make ££ pensions ” subject to income tax (££ pensions ” were already exempt therefrom by section 70 of the Civil Service Law, but the word ££ pensions ” was put into the Constitution, we assume, to make clear that this exemption was not being abolished). Retirement benefits were originally exempt from estate taxes but this exemption was, apparently, abolished by section 249-kk in 1930 (and the abolition confirmed and continued in 1947 by an amendment to section 91 of the Civil Service Law). Thus, when section 7 of article V of the State Constitution was adopted in 1938, to make retirement system membership and benefits contractual, these annuities were already subject to estate taxes.
The next question is as to whether decedent, when he chose option 3, made to his wife ££ a transfer * * * intended to take effect in possession or enjoyment at or after his death ” (Tax Law, § 249-r, subd. 3). The Surrogate wrote a convincing analysis of this problem. He pointed out that while, during
We do not agree with the executrix, here, that what Endemann did, at retirement, was merely to “ renounce ” part of his retire
Both counsel here are in agreement that this is a so-called “ joint and survivorship annuity ” and that such an annuity would be included in a tax estate, if purchased from an insurance company. (If, however, decedent had bought, not a joint annuity but an annuity for his wife only, that would have been a present completed gift, apparently not subject to estate tax.) It seems to us that decedent here did, in effect, purchase a joint and survivorship annuity, out of his retirement funds, when he chose the option. His executrix argues against that concept, telling us that the reason a commercially purchased joint and survivorship annuity is taxable under estate tax statutes is that, by purchasing it, decedent, during his lifetime, depletes his funds which otherwise would have been part of his estate at his death, theoretically. There is at least one answer to that: this testator did, by electing this type of annuity, reduce his own annual retirement allowance from $3,747.69 to $3,140.60, or $600 per year for the rest of his life, and thus suffered the same sort of theoretical estate depletion, but on an installment basis.
Our third, and last, question is as to the correct method of valuing the property right which came to the widow at death. The appraiser accepted the Insurance Superintendent’s valuation (made pursuant to Tax Law, § 249-v, which says it is “ conclusive ”). At decedent’s death the appropriate tables showed that the present value of $1 per year for the life of a person aged seventy-three (like this widow) was $5.45928, which, multiplied by the $1,570.20 annuity, made a value of $8,572. The Appellate Division, however, said that the Superintendent’s computation should not be used since the evidence showed the “ actual value of the asset ”. By that, the court meant that since decedent had an “ initial reserve ” in the system of $34,183.04, and took for himself a retirement allowance of $3,140.60 to which $28,668.60 of that reserve was proportionately applied, the
Further evidence of the error in the Appellate Division’s formula is found in this: the executrix says that if, as held by the Appellate Division, the value of the annuity was, at retirement date, $5,514.44, then it must have been worth less at death since her right, when her husband was eleven years younger, to an annuity was worth more than when she received it, eleven years later when she was eleven years older. We must do what section 249-v of the Tax Law mandates, and take the Insurance Superintendent’s calculated value of the annuity at the date of decedent’s death.
Of course, this executrix is not much concerned about the method of valuation since, at the highest figure suggested, that is, the appraiser’s $8,572, the New York State estate tax here involved would be only $85.72. However, the question may be important in other cases. Both sides agree that the Appellate Division’s valuation method is incorrect since it assumes that a certain proportion of the initial reserve was the correctly calculated value of Mrs. Endemann’s annuity, and there is no proof that the reserve was so calculated. The comparatively simple position of the State Tax Commission on this valuation question is: that, included in Endemann’s tax estate when he
The executrix says that this taxation is somehow invalidated by section 7 of article V of the State Constitution which says that, after July 1,1940, “ membership in any pension or retirement system of the state or of a civil subdivision thereof shall be a contractual relationship, the benefits of which shall not be diminished or impaired ”. The argument of the executrix in this connection is that retirement benefits are here being impaired by the State because the avails thereof are being diminished by taxation. The executrix ascribes too much meaning to section 7 of article V. The New York estate tax, as applied to tax this annuity, was in effect long before 1940,
The order appealed from should be modified in accordance with this opinion, and, as so modified, affirmed, without costs.
Lewis, Oh. J., Conway, Dye, Ftjld, Froessel and Van Voorhis, JJ., concur.
Ordered accordingly.