Court Opinion

ID: 9458622
Source: CourtListenerOpinion
Date Created: 2023-08-04 20:57:08.46146+00
Date Added: 2024-06-11T17:35:49.978141
License: Public Domain

SWYGERT, Chief Judge
(dissenting).
In my opinion the Tax Court erred in ruling that section 403(a)(2) of the Internal Revenue Code applies to the facts of this case. In so ruling that court observed, “The annuity plan represents a mere continuation, in non-trusteed form, of the preexisting plan and as a result bears close resemblance to the prior plan.’’ Therein lies the error. No qualified annuity pension plan existed after 1957. All that remained at the time of the 1961 payment was the annuity contract (as distinguished from an annuity pension plan) which had been distributed to John F. Benjamin at the time the Uhlmann Grain Company terminated its pension plan in 1957. The lump sum payment received by Benjamin’s widow in 1961 was realized from the annuity contract and therefore should be treated as ordinary income under sections 402(a) (1) and 72 of the Code.
In 1945 Uhlmann established a pension plan, in trusteed form, which qualified for tax exempt status under the applicable provisions of the 1939 and 1954 Codes. From its inception the plan was funded by the purchase of individual annuity contracts for each participating employee. Benjamin’s annuity contract was purchased from the Mutual Life Insurance Company of Newark, New Jersey.
Under the pension plan, Benjamin’s retirement date was November 1, 1955. On that date, the trustees entered into a retention agreement with the insurance company whereby the insurance company was to retain the proceeds from Benjamin’s annuity policy, with interest at 2%. percent, for five years or until his death. At the end of that period, a monthly annuity was to commence pursuant to one of the settlement options under the policy. The trustees retained the rights to withdraw the annuity proceeds retained by the company or to commence the annuity payments in accordance with one of several settlement options at any time prior to the expiration of the five-year retention period.
In October 1957, the Uhlmann Company terminated the pension trust. The Internal Revenue Service issued letter rulings, stating that this termination would not adversely affect the prior *990qualified status of the plan or the tax exempt status of the trust.
Pursuant to the termination of the trust, the annuity contracts which had been purchased for the participating employees were distributed to them. Benjamin thereafter modified the retention agreement so as to grant him the power to request the commencement of the monthly annuity payments prior to November 1, 1960. He did not exercise this power, and, on November 1, 1960, the insurance company commenced payment of the monthly annuity. Benjamin died on February 27, 1961, after receiving four monthly payments. His widow was the secondary beneficiary under the annuity contract. Several months after his death, she surrendered the contract to the insurance company in exchange for a lump sum payment.
Capital gains treatment is accorded certain lump sum distributions from pension plans administered either by an employee’s trust under section 402 (a)(2), or by an insurance company pursuant to a nontrusteed annuity plan under section 403(a)(2). The principal question on this appeal is whether the 1961 payment to Mrs. Benjamin qualifies for capital gains treatment under either section. I agree with the majority that section 402(a)(2) is inapplicable since the trust terminated in 1957. Section 402(a)(2) requires that the payment amount to the “total distributions payable” under the trust and that it be “paid to the distributee within 1 taxable year of the distributee on account of the employee’s death or other separation from the service, or on account of the death of the employee after his separation from the service.” Upon termination of the pension trust in 1957, each employee, including Benjamin, received his entire interest in the trust in the form of annuity contracts. The 1957 distribution, however, does not come within section 402(a)(2) since it was not a distribution of the proceeds owed Benjamin under the plan nor was it occasioned by his death or separation from service. The 1961 lump sum payment, which was triggered by Benjamin’s death, fails to qualify as the “total distributions payable” under the trust since after 1957 there was nothing left to distribute.
I disagree with the majority’s holding that section 403(a)(2) is applicable. Code sections 401 through 404 which grant tax-exempt status to certain kinds of pension plans are precisely drawn and should be narrowly construed. The basic rule is that amounts distributed to an employee under an exempt plan are taxable as ordinary income. Capital gains treatment is the exception and is accorded only those lump sum distributions that meet the specific requirements of sections 402(a)(2) and 403(a)(2). See, e.g., Gunnison v. Comm’r of Internal Revenue, 461 F.2d 496 (7th Cir., 1972). At the very minimum the distribution must be made pursuant to a pension plan of the kind described in section 401(a). I can find no plan, trusteed or nontrusteed, continuing beyond 1957. In general, section 401(a) of the Code and Treasury Regulation section 1.401-1 (b) (1) (i) place the burden on the employer to establish a qualified plan and to maintain its qualified status. I cannot believe that in the instant case assignment of the annuity contracts to the individual employees— without more — meets this test. Indeed, Uhlmann’s 1957 letter to the Internal Revenue Service specifically stated that it was terminating not only the pension trust but the pension plan as well. The letter indicated Uhlmann’s concern about the effect of the termination upon the plan’s previous qualification. It did not announce the continuation of the plan in nontrusteed form or seek a determination of its continued qualification.
I do not agree with the majority’s construction of the 1958 letter from Uhl-mann to the insurance company. The letter suggests a modification of the 1955 retention agreement and describes the tax consequences to the participants. The retention agreement, however, had been executed by Trustees of the plan and could be altered only with their con*991sent. This was so even after 1957 since the retention agreement was not part of the annuity contracts that had been distributed to the participants in that year. Later in 1958, the Trustees did modify the agreement along the lines suggested in the letter. No one argues that the Trustees’ actions indicate the continuation of the pension trust after 1957. Rather, the majority takes the Trustees’ actions as evidence of Uhlmann’s post-1957 role in maintaining a nontrusteed pension plan. I cannot accept this interpretation since I believe that it renders meaningless the Code’s distinction between sections 402(a) (2) and 403(a) (2).
Continuation of the plan may also be evidenced by the provisions of the annuity contract — independent of the employer’s actions. In the instant case, the annuity contract was the funding mechanism for the overall pension plan and contained only a skeletal rendering of the original plan. There were, for example, no provisions outlining the requirements for eligibility, benefits, or employee contributions. Thus, since I find that no qualified annuity pension plan existed in 1961, the 1961 distribution from the annuity contract did not qualify for capital gains treatment under section 403(a)(2).