206 F. Supp. 901 | D. Conn. | 1962
When Thomas C. McCobb retired as an executive of the Standard Oil Company of New Jersey in 1944, he became entitled to receive a “retirement allowance” under an “Annuity Plan for the Employees of Standard Oil Company (New Jersey) and its Participating Subsidiaries Effective January 1, 1932” [Annuity Plan]. Briefly, this was a plan covering all employees meeting certain past service requirements, funded by annual contributions of the company. McCobb also became a participant in the “Supplemental Annuities” portion of the plan which enabled him to augment his retirement allowance at the joint expense of the company and himself. His contributions under this part were in the form of payroll deductions. This portion of the plan was also funded. Neither party claims that this was a “qualified plan” within the requirements of § 401, I.R.C.1954, 26 U.S.C.A. § 401. Other details of the Annuity Plan need not be considered. The parties do not question that it provided annuities for the participants.
In 1941, during McCobb’s employment, the company adopted a “Death Benefit Plan for Annuitants of the Standard Oil
The Death Benefit Plan was unfunded. It was “ * * * adopted as a program for supplementing benefits provided by law * * * ”, and the cost was borne wholly by the company. By virtue of a provision in the Death Benefit Plan (Part VII) reserving the right of change, termination or cancellation of ratification, the company terminated that plan as to anyone who became an “annuitant” after July 1, 1947. Payments under the Death Benefit Plan amounted to twelve times the monthly retirement allowance less the government benefits provided by law to the following classes of surviving beneficiaries, in preferential order: (1) Widow; (2) Minor children, in equal shares; (3) Parents, in equal shares; and thereafter other dependent relatives. A qualification for each class is that the beneficiary was either living with the retired employee or receiving support from him to the extent of at least 20% of his retirement allowance.
The question presented by the cross-motions for summary judgment in this action by the estate for a refund of estate taxes paid upon that portion of the gross taxable estate attributable to the addition thereto of the sum of the payments made under the Death Benefit Plan to the widow of McCobb for a period of one year after his death is whether the Commissioner’s action was proper in requiring those payments to be included in her husband’s gross estate for assessment of taxes thereon.
The contentions of the parties center upon an interpretation of § 2039, a new section added to the 1954 Code, which had no counterpart in the old Code. The pertinent subsections are as follows:
“(a) General. — The gross estate shall include the value of an annuity or other payment receivable by any beneficiary by reason of surviving the decedent under any form of contract or agreement entered into after after March 3, 1931 (other than as insurance under policies on the life of the decedent), if, under such contract or agreement, an annuity or other payment was payable to the decedent, or the decedent possessed the right to receive such annuity or payment, either alone or in conjunction with another 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.
“(b) Amount includible. — Subsection (a) shall apply to only such part of the value of the annuity or other payment receivable under such contract or agreement as is proportionate to that part of the purchase price therefor contributed by the decedent. For purposes of this section, any contribution by the decedent’s employer or former employer to the purchase price of such contract or agreement (whether or not to an employee’s trust or fund forming part of a pension, annuity, retirement, bonus or profit sharing plan) shall be considered to be contributed by the decedent if made by reason of his employment.”
At the outset, it is desirable to consider whether the sum of the payments made to the widow, who qualified as a dependent of the decedent, was “an annuity or other payment” within the meaning of those words in § 2039, leaving aside for the moment the question whether the payments were receivable under “any form of contract or agreement.” By specifically qualifying the payments receivable as those “(other than as insurance under policies on the life of the decedent)”, the statute on its face makes a distinction between life insurance proceeds and “an annuity or other payment.” Additional support for the view that the framers of the statute were concerned primarily only with taxing the remaining value of a joint and survivor annuity to which a decedent was entitled
“Under present law the value at the decedent’s death of a joint and survivor annuity purchased by him is includible in his gross estate. It is not clear under existing law whether an annunity of that type purchased by the decedent’s employer, or an annuity to which both the decedent and his employer made contributions is includible in the decedent’s gross estate.”
The payments to Mrs. McCobb were functionally “insurance” because the payments in this case were designed to provide partial protection for one year to her as a dependent beneficiary against loss of retirement allowances to her husband through his untimely death. This is hardly the case of a typical survivor-ship annuity which is designed to return premiums paid plus interest to the primary annuitant and his designated survivor through the duration of their life expectancies. See Ackerman, Insurance, 3 RETIREMENT, p. 56 (3rd Ed. 1948). The payments made in this case did not become payable until after McCobb died.
While the statute does read “insurance under policies”, case law has approved employer insurance payments as “insurance.” See Commissioner of Internal Revenue v. Treganowan, 2 Cir., 1950, 183 F.2d 288, cert. den. 340 U.S. 853, 71 S.Ct. 82, 95 L.Ed. 625. Even if the plans are read together
“INSURANCE UNDER POLICIES ON THE LIFE OF THE DECEDENT. If an annuity or other payment receivable by a beneficiary under a contract or agreement is in substance the proceeds of insurance under a policy on the life of the decedent, section 2039(a) and (b) does not apply. For the extent to which such an annuity or other payment is includible in a decedent’s gross estate, see section 2042 and § 20.-2042-1.” F.T.R. 1960, 20.2039-1 (d).3
The payments to Mrs. McCobb were not properly included in the decedent’s gross
Turning next to § 2042 I.R.C.1954 to consider whether the death benefits paid to Mrs. McCobb were taxable in the estate under the provisions of § 2042, the test now becomes whether the decedent had any control over the right to receive the Death Benefit Plan proceeds at his death. The portions of the Death Benefit Plan relevant to this question are set forth in the margin.
The absence of a formal contract from a life insurance company should not prevent consideration of payments, which functionally are “life insurance proceeds”, as insurance for tax purposes. See Commissioner of Internal Revenue v. Treganowan (supra). Cf. Kernochan v. United States, 29 F.Supp. 860, 89 Ct. Cl. 507 (1939), cert. den. 309 U.S. 675, 60 S.Ct. 711, 84 L.Ed. 1019 (1940). In any event, if the promise of the company was not enforceable, so as to prevent consideration of the payments as “insurance”, they would be equally ineligible as payments receivable under “any form of contract or agreement.”
McCobb did not possess the requisite incidents of ownership of the right to
receive the dependency benefits to permit § 2042 to apply.
OTHER SECTIONS
As previously pointed out, the lack of any inter vivos feature excluded the payments from taxation under § 2039, and the absence of incidents of ownership in McCobb prevents their taxation under § 2042. The government contends, nevertheless, that they are taxable under other provisions of the 1954 Code. For death benefits to be taxable under §§ 2035, 2036, 2037 and 2038, there must be property which can be transferred. Under the terms of a plan substantially the same as the one in this case, Dimock v. Corwin, D.C.E.D.N.Y., 1937, 19 F. Supp. 56,
Sections 2033 and 2041 which reach death benefits in which the deceased possessed a property interest at death or
Commentators have recognized that payments of employee death benefits to dependent beneficiaries by employers may escape estate taxation.
There is ample indication that Congress was fully aware of the increasing number of employer-financed death benefits for employees and of the then existing statutes and case law relating to such payments when it enacted § 2039 to include it in the 1954 Code. Whether it should have then correlated the various provisions of the Code so as to subject all employee death benefits to estate taxation under a contribution test as in § 2039(c) or under a control or incident of ownership test under the other sections of the Code in order to prevent this case from falling somewhere between the two is not for the court to decide; nor is it within the province of the court to do so. See Hanover Bank v. Commissioner, 82 S.Ct. 1080, 8 L.Ed.2d 187, 197 (June 1962), fn. 23, quoting from Fabreeka Products Co. v. Commissioner of Internal Revenue, 1 Cir., 1961, 294 F. 2d 876, 879: “Granting the government’s proposition that these taxpayers have found a hole in the dike, we believe it one that calls for the application of the Congressional thumb, not the court’s.”
The defendant’s motion for summary judgment is denied.
The plaintiff’s motion for summary judgment is granted.
The parties are directed to submit a proposed form of judgment in accordance with this opinion within thirty (30) days.
So ordered.
. On the contrary, under Part V, Section 4(b), of the Annuity Plan, McOobb had the option when he retired of receiving a reduced supplemental annuity which was derived from his own contributions and if the payments thereunder, until the time of his death, amounted to less than his own contributions and allowed interest accumulated to the date of his retirement, the difference would be refunded to his designated beneficiary or his estate. The contributions made by the company, whether wholly under the regular annuity, or in part toward the supplemental portion, was not payable to anyone in the event of any “annuitant’s” premature death; presumably that amount (actuarily determined according to the Annuity Plan) was retained by the company for allocation among other annuitants who might outlive their life expectancies.
. There is no inter-related obligation in the two plans. The Annuity Plan is referred to in the Death Benefit Plan for no other purpose than to identify an “ánnuitant.”
. The regulation goes on to discuss a method of analyzing a “retirement income” policy, with death benefits based upon a terminal reserve figure for determining when such a policy contract may no longer have an insurance element. In the pres
. “Part II. DEFINITIONS:
“(f) The term ‘widow’ shall mean the decedent’s wife who was lawfully married to him either by civil or religious ceremony both at the time of his retirement and at his death, and who was either living with him or in receipt of support from him at the time of his death to the extent of at least twenty per centum (20%) of his retirement allowance then in effect.
“(g) The term ‘minor children’ shall include a child born of a lawful marriage contracted by the decedent either by civil or religious ceremony, stepchild and child legally adopted by the decedent, who was under twenty-one (21) years of age and either living with him or in receipt of support from him at the time of his death to the extent of at least twenty per centum (20%) of his retirement allowance then in effect.
“(h) The term ‘parents’ shall include a natural parent, step-parent or foster parent of the decedent who was either living with him or in receipt of support from him at the time of his death to the extent of at least twenty per centum (20%) of his retirement allowance then in effect.
“Part III. AMOUNT OF BENEFIT— BENEFICIARY:
“(a) In the event of the death of an annuitant, a death benefit in an amount equal to the excess, if any, of the decedent’s annuity income over his government ' benefit shall be payable to the person or persons in the first of the following classes of preference beneficiaries of which a member or members shall survive the annuitant:
“The annuitant’s: 1. Widow
2. Minor children in equal shares
3. Parents in equal shares,
excluding, however, any person who shall have been previously excluded at the request of the annuitant and with the written approval of the former employer.
“(b) If no person qualifies under Class 1, 2 or 3 of subdivision (a) above and there is a surviving relative or relatives by blood or marriage toward whose support the decedent regularly contributed a total of not less than $300 during the year preceding death, a special benefit ■ shall be payable in an amount equal to the total of such year’s contributions but , in no case exceeding the death benefit provided under subdivision (a). Such special benefit shall be divided among such dependents in the proportion which the decedent’s contributions to each such dependent bears to the total of his contributions to all such dependents.
“(c) If no death benefit is payable under either (a) or (b) above, and the deceased annuitant was not at the time of his death a subscriber to group insurance under the program of the former employer, such employer may, in its discretion, authorize the payment of reasonable burial expenses in an amount not exceeding $150.
“Part IV. ESTIMATE OF GOVERNMENT BENEFIT:
“The former employer may, in its discretion, estimate the amount of the government benefit. In making such estimate it shall be assumed that the conditions which determined the beneficiary’s eligibility under the law at the time of the annuitant’s death will pertain throughout the period covered by the estimate and that prompt application for the government benefit is made. Any such estimate shall be conclusive and binding on all beneficiaries under this Plan for the purpose of any settlement hereunder.
“If the foregoing method of estimating the amount of the government benefit is not adopted, the qualifying beneficiary or beneficiaries concerned shall be required to furnish proof, satisfactory to the former employer, of the amount and apportionment of the government benefit. Under these circumstances no benefit payment to such a beneficiary shall be authorized until such proof is furnished.”
. Dimock v. Corwin (supra) considered the statutory predecessors of §§ 2033, 2035 and 2038 I.R.C. 1954.
. G.C.M. 27242:
“Accordingly, it is the opinion of this office that where an employee has the right to designate the beneficiary of a death benefit under a profit-sharing and retirement plan, the employee, at the time of his death, is in possession of such rights as constitute property within the meaning of section 811(a) of the Internal Revenue Code [of 1939], provided that prior to the employee’s death the employer has not withdrawn the right of the employee to designate a beneficiary, and has not eliminated all death benefits. Thus, the amount payable under the plan to the designated beneficiary is includible in the deceased employee’s gross estate under section 811(a) (c), (d), and (f) of the Code [of 1939].”
. See House & Senate Reports — Detailed Discussion relating to § 2039, U.S.Code, Cong. & Adm.News, 83rd Cong.2d Sess. 1954, Vol. 3, pp. 4458 and 5115 respectively, where the language is used to explain what employer contributions shall be taken into account under (b) to value the annuity.
. In an extensive study of estate taxation of death benefits entitled “Employee Death Benefits”, 66 Y.L.J. 1217 (1957) this is noted on p. 1233, fn. 70.