T.C. Summary Opinion 2006-45

UNITED STATES TAX COURT

ANDREW J. EBERLY AND RUTHANNE E. EBERLY, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 6926-04S. Filed March 29, 2006.

Gary C. Randall and James J. Workland, for petitioners.

Catherine L. Campbell, for respondent.

CARLUZZO, Special Trial Judge: This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed. Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for 2000. The decision to be entered is

not reviewable by any other court, and this opinion should not be

cited as authority.
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Respondent determined a $36,859 deficiency in petitioners’

2000 Federal income tax.

The issue for decision is whether a distribution

constructively received in 2000 by Andrew J. Eberly (petitioner)

from his father’s estate is includable in petitioners’ income for

that year as income in respect of a decedent within the meaning

of section 691(a). 

Background

Some of the facts have been stipulated and are so found. At

the time the petition was filed, petitioners resided in Colbert,

Washington. 

Petitioner’s father, William S. Eberly (decedent), was born

on November 9, 1925, and died on February 28, 2000. He was

survived by three sons, one of whom is petitioner. At the time

of his death, decedent was a participant in the Central

Washington University (CWU) Retirement Plan (the CWU retirement

plan), a qualified plan within the meaning of section 403(b)(1). 

The CWU retirement plan provides, in relevant part, that the

minimum distributions from the plan must begin no later than

April 1 of the calendar year following the calendar year in which

the participant attains the age 70-1/2, or, if later, April 1

following the calendar year in which the participant retires from

CWU. Decedent retired from CWU on December 16, 1999. Given his
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age at the time, the minimum distributions under the CWU

retirement plan would have begun no later than April 1, 2000.

Teachers Insurance and Annuity Association and College

Retirement and Equities Fund (TIAA-CREF) are the fund sponsors of

the CWU retirement plan. TIAA-CREF provides, in general, various

annuity plan options for participants in the CWU retirement plan. 

The TIAA-CREF annuity provisions state that a participant

“may during his lifetime, without the consent and to the

exclusion of any other person, receive, exercise, and enjoy every

benefit, option, right and privilege conferred” by the TIAA-CREF

annuity plan. After a participant’s termination of employment,

the TIAA-CREF annuity provides the participant with the option to

receive a lump-sum benefit from the participant’s accumulated

annuity funds. A request for a lump-sum distribution must be

made before the start of any annuity payments. Such a request

“cannot be revoked after the effective date” of the lump-sum

distribution request. The value of the accumulated annuity funds

for a lump-sum distribution is determined as of the end of the

business day on which TIAA-CREF receives the participant’s

request for a lump-sum distribution. 

Under the TIAA-CREF annuity’s death benefits provision, if

the participant dies prior to the annuity starting date then

TIAA-CREF pays the participant’s accumulated annuity funds to the

participant’s named beneficiaries. The participant may designate
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or change the death benefits beneficiaries by giving written

notice to TIAA-CREF’s home office in New York City. 

With respect to the procedures for elections and requests,

the TIAA-CREF annuity provides, in part, as follows:

An election or change may be made, in accordance

with the terms of your certificate, by written notice

satisfactory to [TIAA-CREF]. No such notice will take

effect unless it is received by [TIAA-CREF] at its home

office in New York, NY. Any notice of change in

Beneficiary or other person named to receive payments

will take effect as of the date it was signed, whether

or not the signer is living at the time we received it. 

Any other notice will take effect as of the date it is

received. * * * 

On February 21, 2000, prior to the annuity start date,

decedent executed a Request for a Retirement Annuity Withdrawal

(withdrawal request). The withdrawal request directed TIAA-CREF

to withdraw $600,000 from decedent’s accumulated annuity fund

balance and to deposit these funds into decedent’s designated

savings account. The withdrawal request was signed and dated by

decedent and mailed to TIAA-CREF’s home office in New York City

by priority mail. The withdrawal request was received at TIAACREF’s home office on February 28, 2000, and, as provided by the

TIAA-CREF annuity, made effective as of that date.

On February 21, 2000, petitioner also executed a Designation

of Beneficiary, which was mailed to TIAA-CREF’s home office 

by priority mail. The Designation of Beneficiary named

decedent’s three sons as beneficiaries, each entitled to a death 

benefit equal to 25 percent of the annuity fund balance, with 
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1 As of that date, the balance of decedent’s TIAA-CREF

accumulated annuity fund was $953,996. This balance does not

take into account decedent’s $600,000 withdrawal request. 

the remaining 25 percent to be equally divided among three

specifically identified charitable organizations. The

Designation of Beneficiary was received by TIAA-CREF on 

February 29, 2000.

On February 28, 2000, TIAA-CREF was orally notified by CWU

of decedent’s death.1 Pursuant to the withdrawal request, on

March 3, 2000, TIAA-CREF electronically transferred $480,308 to

decedent’s bank account. This amount included interest for the 

3 days from the date the withdrawal request was received until

March 3, less $120,000 of Federal income tax withholdings. For

the year 2000, TIAA-CREF issued to decedent a Form 1099-R,

Distributions From Pensions, Annuities, Retirement or ProfitSharing Plans, IRAs, Insurance Contracts, etc., that reported the

gross amount and taxable amount of the distribution to decedent,

as well as the Federal tax withheld by TIAA-CREF on the

distribution. 

Decedent’s last will and testament provided that the

residuary of decedent’s estate was to be divided equally among

decedent’s three children. The amount distributed by TIAA-CREF

to decedent on March 3, 2000, was divided among decedent’s three

children by the personal representative of decedent’s estate. On

April 25, 2000, the personal representative issued three separate
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2 This amount reflects the taxable amount of the

distribution reported on the Form 1099-R, Distributions From

Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,

Insurance Contracts, etc., less the $450,000 received by

decedent’s three children. The personal representative

erroneously determined that the $450,000 received by decedent’s

three children for the three IRAs was a tax-free “roll-over”

under sec. 403(b)(8).

3 After decedent’s death, TIAA-CREF computed the 25 percent

death benefits distribution to the charitable beneficiaries based

upon the balance in the annuity fund after the $600,000

distribution to decedent.

checks each in the amount of $150,000 to Farmer’s New World Life

Insurance Company. Each $150,000 check was issued for an

individual retirement account (IRA) in the name of each of

decedent’s three children. 

On decedent’s 2000 Form 1040, U.S. Individual Income Tax

Return, the personal representative reported the lump-sum

distribution from decedent’s TIAA-CREF accumulated annuity fund

as reported on the Form 1099-R. However, the personal

representative erroneously reported the taxable amount of the

distribution to be $149,949.2

On decedent’s Form 706, United States Estate (and

Generation-Skipping Transfer) Tax Return, the personal

representative included the remaining balance of decedent’s TIAACREF accumulated annuity funds in decedent’s gross estate.3 On

Form 1041, U.S. Income Tax Return for Estates and Trusts,

decedent’s estate did not report any amount with respect to
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decedent’s distribution from the TIAA-CREF accumulated annuity

funds.

Petitioners did not include the $150,000 distribution

petitioner constructively received from his father’s estate on

their timely filed, joint 2000 Federal income tax return. 

In the notice of deficiency, respondent determined that the

$150,000 constructively received by petitioner is includable in

petitioners’ income as income in respect of a decedent under

section 691. Other adjustments made in the notice of deficiency

are computational and not in dispute. 

Discussion

At the outset we note that petitioners now acknowledge the

errors made on decedent’s final Federal income tax return and

estate tax return. They distance themselves from those errors

and also retreat from their position taken earlier that, if

otherwise includable in their income, the $150,000 distribution

was subject to exclusion on account of the “roll over”. 

Respondent does not suggest that any of these errors in any way

estop petitioners from their present position that the $150,000

distribution, constructive or otherwise, was an excludable

inheritance, see sec. 102(a), and not income in respect of a 

decedent within the meaning of section 691(a). Furthermore,

nothing in the record suggests that there has been any

deviousness or mischief surrounding the dates reflected on the
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operative CWU retirement plan documents. Consequently, we turn

our attention to the controlling Federal and State law that

informs the manner in which we resolve the issue here in dispute.

Section 61(a) provides that gross income includes all income

from whatever source derived, including income from annuities and

“income in respect of a decedent”. Sec. 61(a)(9), (14).

Section 403(b)(1) generally provides that if an annuity

contract is purchased for an employee by certain tax-exempt

employers, or for an employee who performs services for an

educational organization by an employer as described in section

403(b), and if certain other requirements are met, then amounts

contributed by such employer for such annuity contracts shall be

excluded from the gross income of the employee for the taxable

year. Amounts distributed from employee annuity contracts under

section 403(b) are taxable to the distributee in the year in

which distributed under section 72. Sec. 403(b)(1). 

Section 72(e) provides, in general, that if a distribution

is received prior to the annuity starting date, in a form other

than an annuity, such distribution shall be included in gross

income. Under the general rule, amounts received before the

annuity starting date are included in income to the extent such

amounts are allocable to income on the contract, and not included

in income to the extent such amounts are allocable to the

investment in the contract. Sec. 72(e)(2)(B). 
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Section 691 concerns the taxation of income in respect of a

decedent (IRD). Section 691(a) provides in part:

(1) General rule.--The amount of all items of

gross income in respect of a decedent which are not

properly includible in respect of the taxable period 

in which falls the date of his death or a prior period 

* * * shall be included in the gross income, for the 

taxable year when received, of:

(A) the estate of the decedent, if the right 

to receive the amount is acquired by the

decedent’s estate from the decedent;

(B) the person who, by reason of the death of

the decedent, acquires the right to receive the 

amount, if the right to receive the amount is not 

acquired by the decedent’s estate from the decedent; 

or

(C) the person who acquires from the decedent

the right to receive the amount by bequest, 

devise, or inheritance, if the amount is received 

after a distribution by the decedent’s estate of 

such right.

Section 1.691(a)-1(b), Income Tax Regs., provides that

“income in respect of a decedent” refers to those amounts to

which a decedent was entitled as gross income but that were not

properly includable in computing taxable income for the taxable

year ending with the date of death or for a previous taxable year

under the method of accounting employed by the decedent. The

character of an item of IRD to the successor is the same

character as the item would have had in the decedent’s hands 

“if the decedent had lived and received such amount.” Sec.

691(a)(3).
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4 We note that the three charities that were designated

beneficiaries under decedent’s TIAA-CREF annuity would have been

entitled to share a significantly larger death benefit

distribution under respondent’s position.

The CWU retirement plan, which includes the TIAA-CREF

annuity, qualifies as a tax-deferred plan under section

403(b)(1). Accordingly, distributions under the CWU retirement

plan are taxable under section 72.

Respondent contends that the amount received by petitioner

was a death benefits distribution from the TIAA-CREF annuity and

IRD under section 691(a). According to respondent, the $150,000

distribution to petitioner is taxable under section 72 as if

decedent had received such amount. Petitioners and respondent,

of course, disagree on this point, but seem to agree that State

law controls the outcome. Respondent argues that TIAA-CREF

improperly and mistakenly gave effect to the withdrawal request

because decedent had died before the request was received. 

Respondent’s argument is based upon the premise that the death of

petitioner’s father in some manner or another voided the

withdrawal request. The manner in which the relevant events

unfolded, however, demonstrates that respondent’s view is

somewhat unique. TIAA-CREF, the personal representative of

decedent’s estate, and the three charities named in the change of

beneficiary apparently do not share respondent’s view.4
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Furthermore, we find no support for respondent’s position

under Washington State law. The Supreme Court of Washington has

held that “a pension granted to a public employee * * * is

contractual in nature.” Jacoby v. Grays Harbor Chair &

Manufacturing Co., 468 P.2d 666, 669 (Wash. 1970); see also

Caughey v. Employment Sec. Dept., 503 P.2d 460 (Wash. 1972);

Bakenhus v. Seattle, 296 P.2d 536 (Wash. 1956). In Boeing

Airplane Co. v. Firemen’s Fund Indem. Co., 268 P.2d 654, 658

(Wash. 1954), the court stated that “Where the terms of a

contract taken as a whole are plain and unambiguous, the meaning

of the contract is to be deduced from its language alone, and 

it is unnecessary for a court to resort to any aids to

construction.” Furthermore, “Where contractual language is

unambiguous courts will not read ambiguity into the contract.” 

Jacoby v. Grays Harbor Chair & Manufacturing Co., supra at 670. 

The CWU retirement plan and TIAA-CREF annuity are contracts. 

The TIAA-CREF annuity provides that decedent could “during his

lifetime * * * receive, exercise, and enjoy every benefit,

option, right and privilege conferred” by the TIAA-CREF annuity. 

One such right conferred by the TIAA-CREF annuity is the

participant’s right to elect to receive a lump-sum distribution

from his accumulated annuity funds prior to the annuity start

date. With respect to exercising the right to a lump-sum

distribution, the TIAA-CREF annuity specifically provides that
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any such election must be made in writing and received by TIAACREF at its home office. These terms are plain and unambiguous. 

Prior to his death and the annuity start date, decedent

elected to receive a lump-sum distribution. In accordance with

the TIAA-CREF annuity’s requirements, decedent’s withdrawal

request was made in writing and mailed to TIAA-CREF’s home

office. The withdrawal request was received at TIAA-CREF’s home

office on the same date as decedent’s death. While TIAA-CREF was

notified of decedent’s death, decedent’s withdrawal request was

made effective by TIAA-CREF on the date received per the terms of

the TIAA-CREF annuity. The record is clear that TIAA-CREF

processed the distribution to decedent as a lump-sum

distribution. TIAA-CREF subsequently distributed the funds to

decedent. In accordance with the TIAA-CREF annuity’s provisions,

TIAA-CREF calculated and paid interest to decedent on the

$600,000 distribution for the time between the effective date of

the withdrawal request and the date the funds were electronically

transferred to decedent’s savings account. TIAA-CREF also

withheld Federal income tax on the funds distributed to decedent. 

Finally, TIAA-CREF issued a Form 1099 to decedent which reported

the taxable amount of his lump-sum distribution.

The TIAA-CREF annuity provided decedent with the option of

electing to receive a lump-sum distribution. Decedent exercised

this option to receive a lump-sum distribution during his
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lifetime in accordance with the TIAA-CREF annuity’s requirements. 

Upon receipt of the dated and signed withdrawal request from

decedent, TIAA-CREF’s obligation to distribute the funds became

absolute. See, e.g., Macartney v. Parmenter, 109 F. Supp. 493

(D.R.I. 1952); Pac. States Life Ins. Co. v. Bryce, 67 F.2d 710

(10th Cir. 1933). Receipt of decedent’s withdrawal request and

actual payment to decedent during his lifetime were not required

by the terms of the TIAA-CREF annuity.

The receipt by TIAA-CREF of the dated and signed withdrawal

request from decedent constituted an effective exercise by him of

his right to a lump-sum distribution during his lifetime. The

lump-sum distribution from TIAA-CREF was income to decedent and

properly includable in his 2000 gross income. Therefore, we hold

that the $150,000 received by petitioner was not a death benefits

payment and is not includable in petitioners’ gross income under

section 691(a) as IRD.

Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect the foregoing,

Decision will be entered

for petitioners.