Court Opinion

ID: 4482604
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:35.16582+00
Date Added: 2024-06-11T15:03:39.291311
License: Public Domain

Hall, J., concurring: While I concur in the results reached by the majority, I cannot subscribe to some of the language in the opinion. In my view, the annuity proceeds are includable in decedent’s gross estate solely because decedent, by his inaction when he reached normal retirement date, avoided the clear intent and requirement of his retirement plan that the annuities were then to go into pay status, and thereby effectively converted them into savings accounts to be held at interest which accumulated for his benefit. By doing so, he removed them from the statutory category of “payment receivable * * * under a contract purchased by an employees’ trust * * * part of a pension * * * plan” and precluded the availability of a section 2039(c) exclusion to his estate. The income and the estate tax benefits provided by Congress with respect to qualified employee benefit plans are both generous and unique in the Code. For income tax purposes, amounts contributed by an employer under such a plan are normally both deductible to the employer (section 404) and excludable from the employee’s income (section 402). Such amounts accumulate tax free until distribution (section 501(a)), and upon ultimate distribution are accorded still further special tax advantages (section 402). Finally, payments receivable by a beneficiary under such a plan are excludable from a decedent’s gross estate under section 2039 (c). Proper construction of the details of this entire statutory scheme should commence with the recognition that Congress sought to facilitate the provision by employers, on a nondiscriminatory basis, of a private retirement system on which the hand of the tax collector was intended to rest lightly.1 Such objectives ought not to be frustrated by accepting respondent’s invitation to read into the language of the Code new prerequisites for the tax benefits so offered which are not plainly required to carry out the statutory purpose and intent. Within this overall framework, the purpose of section 2039 (c) was apparently to prevent the erosion by estate taxes of amounts payable to beneficiaries under qualified plans, leaving such beneficiaries generally taxable on such amounts in the same manner and to the same extent as the decedent-employee would have been had he survived. Where amounts are in fact payable under the terms of a qualified retirement plan, they are entitled to this benefit. Respondent, paying little heed to the statutory purpose, points out that in 1957 the Pension Trust Committee had the right, instead of furnishing decedent with the annuity contracts in question at the time of decedent’s termination from employment, to cash in the contracts and pay cash to decedent. Respondent observes further that after decedent had received the contracts, he could have surrendered them for cash, even though he did not. Respondent contends that the existence of such unexercised rights removes the contracts in question from the protection of section 2039(c) and exposes their proceeds to the estate tax. In my view, this contention should be firmly rejected as inconsistent not only with the statutory language but with the beneficent purpose of the tax law providing special tax benefits for qualified plans, and as effectively negating section 2039 (c). Qualified retirement plans frequently and customarily include optional provisions permitting payment of benefits in the form of cash in a lump sum on separation from service. The Code not only contemplates such payments but expressly provides them with favorable tax treatment. Sec. 402(a) (2). In the absence of any clear indication in the Code or regulations that the mere provision in a plan for the possibility of such payments at the time of retirement, whether exercisable at the option of the trustee, plan administrator or the participant, was intended to preclude the applicability of section 2039(c) in cases where no such option was in fact exercised, we ought to have little patience with any such contention. By the same token, respondent’s argument that section 2039 (c) is inapplicable if an annuity contract distributed to a participant may be surrendered for cash exceeds the statutory language and intent. If there had in fact been such a surrender, of course the resulting cash would be includable. But where an asset is in terms excludable from the gross estate, the mere fact that it could have been (but was not) exchanged for another asset (cash) not so excludable is no warrant for overriding the clear statutory language. This point derives added force from the fact that retirement annuities not yet in pay status are, indeed, customarily so excliangable.2  In the light of industry practice, little would be left of section 2039(c) were respondent’s contentions to be accepted. Respondent’s position is particularly puzzling since he makes no such contentions of “constructive receipt” in the highly analogous income tax area. Section 1.402(a)-l(a) (2) of the Income Tax Regulations provides, in part, that if a qualified trust purchases an annuity contract for an employee and distributes it to tlie employee in a year for which, the trust is exempt, the contract containing a cash surrender value which may be available to the employee by surrendering the contract, such cash surrender value will not be considered income to the employee unless and until the contract is surrendered. Estate of George E. Russell, 47 T.C. 8, 10-11 (1966), approved this regulation. See Estate of Harry Snider, 39 T.C. 341 (1962); Estate of Harry Snider, 31 T.C. 1064 (1959); Rev. Rul. 65-267, 1965-2 C.B. 141; Rev. Rul. 55-298, 1955-1 C.B. 394. Rev. Rul. 68-482,1968-2 C.B. 186, notes the rationale for such a position; it holds that the cash value of a section 403 (b) annuity contract is not considered made available to an employee, merely because he can receive the cash value by surrendering the contract and forfeiting his rights thereunder, because the employee suffers a significant penalty in that normally the cash value of an annuity is insufficient to purchase a new annuity contract of comparable or greater value to the employee. Income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions. Sec. 1.451-2, Income Tax Regs. Here decedent has an annuity which is not only guaranteed in advance, but was probably purchased at a lower rate than he could obtain it because of absence of commission or expense. Nor is respondent’s reliance on Northern Trust Co. v. United States, 389 F. 2d 731 (C.A. 7, 1968), well founded. In that case, the court included in a decedent’s estate annuities which had been purchased at age 77 to go into pay status over 17 years later, at age 95. Clearly enough, any such extreme postponement of commencement of pay status leaves no doubt that the annunities in question were being used for the simple accumulation of an estate rather than for a bona fide pension. No pension plan providing for a normal retirement age of 95 would be likely to qualify, for the benefits thereunder would in no meaningful sense be benefits under a true “pension plan.” Sec. 1.401-1(b)(1) (i), Income Tax Regs.; Rev. Rul. 72-241, 1972-1 C.B. 108; Rev. Rul. 72-240, 1972-1 C.B. 108. The assets in question were therefore not receivable 'under “an employees’ trust (or under a contract purchased by an employees’ trust) forming part of a pension * * * plan which * * * met the requirements of section 401(a) [emphasis added].” Had the Northern Trust plan called for a routine postponement of pay status to age 95, it would not apparently have qualified. And assuming the terms of the plan called for a more normal retirement age and an earlier pay status, if the decedent took it on himself with the individual trustees’ cooperation to achieve such a postponement, the amount would have ceased to be received “under” a trust forming part of the qualified pension plan. It would instead have been received under the decedent’s own arrangement, essentially an arrangement for a death-time transfer of wealth in lieu of a pension. Section 2039 (c) therefore would not apply. While agreeing entirely with the result in Northern Trusty I must respectfully disagree with so much of its reasoning as finds the mere availability of a right of cash surrender at the option of a nonadverse committee disqualifying under section 2039(c). Cf. sec. 72(h). The reason I agree with the majority conclusion is that on the facts of the present case decedent did not follow the qualified plan, which called for pay status to commence at age 65. Once decedent strayed materially from the plan’s payment provisions, he converted the payment from one “under” a qualified employee trust into one under his own personal plan, which.he implicitly arranged with the insurance company to substitute for the qualified plan. Having taken himself out from the scope of section 2039(c), he could, no longer rely on its protective power. The pension trust agreement in this case provided that whether or not a participant remained in the company’s employ after age 65, the annuity policy held for the participant’s benefit would go into pay status on the anniversary date of the contract nearest to the participant’s 65th birthday. Decedent was a participant in this plan. Decedent terminated his employment in 1957 when he was 61 years old, at which time the Pension Trust Committee ordered the trustee to deliver to decedent the two annuity contracts which are now under consideration, both of which matured shortly before decedent’s 65th birthday. The contracts provided that if decedent were living on the maturity date (June 30,1961, the anniversary date closest to his 65th birthday) a life annuity with 120 months certain would commence, unless he elected to receive a refund annuity or a joint and survivor annuity. Such commencement, however, was apparently not in practice automatic, but required some affirmative request by decedent, since decedent reached the maturity date and payments did not then commence. The contracts also provided that decedent had the option to begin the annuity earlier or later than age 65, but not later than the anniversary date of the contract nearest his 70th birthday. Decedent died about 2½ months after the anniversary date nearest his 70th birthday, having selected no annuity plan and without receiving any annuity payments under either of the two contracts. The issuing insurance company apparently acquiesced in decedent’s inaction, treating it in effect as a request to leave the cash surrender value at interest well beyond the time (age 65) when the qualified plan contemplated that the annuity would go into pay status. In my view, the contracts in issue ceased to answer the description of section 2039 (c) when decedent, at maturity date (normal retirement age as defined in a pension plan), failed to request the insurance company to commence payment.3 Prior to tliat time decedent held contracts purchased by an employees’ trust forming part of a qualified pension plan. When the contracts were not activated at normal retirement, decedent’s inaction effectively caused an exchange of the qualifying retirement annuity for something other than the retirement annuity, as contemplated by the pension plan, and at that time it ceased to be excludable from his gross estate. What decedent thereafter held was in effect a mere savings arrangement, under which the cash surrender value of his retirement contracts was held for him at interest, an arrangement quite foreign to the wording and intent of the qualified plan. In fact, had the plan contained a provision authorizing the mere indefinite retention and accumulation at interest until death of the amount standing in decedent’s account at the time of termination, the plan probably would not have continued to qualify. See Rev. Rul. 56-656, 1956-2 C.B. 280; cf. sec. 20.2039-2(b), example 4, Estate Tax Eegs. To hold otherwise would permit the conversion, by mere inaction, of a bona fide retirement annuity, subject to income tax under the rules of section 72, into a tax-free savings account, the interest on which would accumulate tax free until death, and which then would also escape estate tax under section 2039 (c). In order to confine the generous provisions of the Code to the true pension to which they were intended to apply (without imposing extra-statutory, judge-made restrictions thereon which would be a trap for the unwary but bona fide pensioner) I would construe section 2039(c) to be unavailable to annuities the commencement of pay status of which had been prolonged beyond the contemplation of the plan, by express or implied special arrangement with the annuity carrier after receipt of the annuity contract.   The Senate Finance Committee has stated in connection with the current legislation in the Congress on Private Pension Plan Reform (Report of the Committee on Finance, United States Senate, Together with Additional and Supplemental Views on S. 1179, S. Kept. No. 93-383, 93d Cong., 1st Sess., pp. 107-108 (1973)) : “Concern has been expressed in the case of the administration of employee benefit plans (and also tax exempt organizations) as to whether the Internal Revenue Service with its primary concern with the collection of revenues is giving sufficient consideration to the purposes for which these organizations are exempt. Many believe that the present organization of the Service causes it to subordinate concern for the protection of the interests of plan participants (or the educational, charitable, etc., purposes for which the exemptions are provided). “On the other hand, the enormous growth in retirement plans during the last third of a century lias proceeded largely under tlie tax regulations of the Internal Revenue Service. Moreover, clearly tile greatest single protection for rank and file employees during this time has been the Internal Revenue Service’s administration of the provision denying any special tax treatment for contributions or benefits discriminating in favor of employees who are officers, shareholders, supervisors, or highly compensated employees. The thrust of this provision is to require broader substantial participation in the plans than would be provided but for the Service’s administration of the statute. “At the same time, it must be recognized that the natural tendency is for the Service to emphasize those areas that produce revenue rather than those areas primarily concerned with maintaining the integrity and carrying out the purposes of exemption provisions. Similar concern has been expressed in the past over the Service’s administration of the provisions of the tax law relating to exempt organizations. “The committee believes that in the employee benefit plan and tax exempt organization area it should be easier to emphasize the basic objectives involved if the activities relating to these plans and exempt organizations were more closely coordinated, if the activities in these areas relating to auditing, rulings, etc. whether in the field or in the national ofiice are brought together and if the top direction for these activities also has specialized in them. For the reasons outlined, the bill establishes a separate office in the Internal Revenue Service, headed by an Assistant Commissioner for Employee Flans and Exempt Organizations to deal primarily with plans that are (or claim to be) qualified under section 401 of the code and organizations that are (or claim to be) exempt from income taxes under section 501(a) of the code. This includes pension, profit-sharing and stock bonus trusts and plans, religious, educational, charitable, organizations and foundations as well as the various other exempt organizations described in section 501(e) of the Code. * * *”    The standard retirement annuity policy provides for a cash surrender value. The annuities in issue are standard contracts. The usual form of retirement annuity is as follows: Level premiums are deposited with the insurance company during the deferral period and accumulate at interest. In the event of the death of the annuitant prior to age 65 (maturity date of the contract), the contract provides for return of the cash surrender value. During the deferral period the owner of the contract (be that the trustee or annuitant) may withdraw the cash value at any time and terminate the contract. On the other hand, if the contract lapses, the cash value Is automatically applied to produce a paid-up deferred annuity in a reduced amount. However, the owner (trustee or annuitant) of the lapsed policy may surrender the paid-up annuity at any time. Premiums for the contract are quoted on the basis that the accumulated sum at maturity will be applied under a life annuity with 120 monthly installments guaranteed. At maturity, however, the annuitant may elect at his option another form of annuity (e.g., joint and survivor), the actual monthly installments being appropriately adjusted. In addition, at maturity, the owner (trustee or annuitant) has the further option of taking the accumulated sum in cash instead of in the form of an annuity. The usual form of retirement annuity permits the annuitant to have the income commenced at an earlier or later date than the one originally specified in the contract with an appropriate adjustment in the amount of income. Thus, the accumulated cash value is applied to the selected age as a single premium to purchase an immediate life annuity with the amount of the annuity income depending upon the amount of the cash value, the age selected, and the form of life annuity chosen. See Huebner & Black, Life Insurance 123-12-1 (8th ed. 1972) ; MaeLean, Life Insurance 61-63 (9th ed. 1962) ; Magee, Life Insurance 74-76 (3d ed. 1958).    The contract contemplates that prior to maturity the annuitant will select the option he prefers (i.e., life annuity with 120 months certain, a refund annuity, or joint and survivor annuity) and Instruct the insurance company to commence payment.