Opinion
Docket No. 15191.
1948-11-8
ESTATE OF EMIL A. STAKE, DECEASED, THE FIRST NATIONAL BANK OF CHICAGO, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Harry B. Sutter, Esq., and Harry D. Orr, Jr., Esq., for the petitioner. A. H. Moorman, Esq., for the respondent.
Decedent, an officer in a bank, was required to contribute to a pension fund, to which the bank also contributed. Under the pension plan, which granted broad powers in the discretion of the bank, an officer having 15 years service with the bank was entitled to a pension upon arriving at the age of 60 years, and his widow was entitled to a pension of one-half the amount to which he was entitled. The bank could in its discretion pay a pension without compliance with the rules by the officer. Decedent, though having served 15 years, died at the age of 54 years and had not been granted a pension. The plan provided that if an officer, without 15 years service, died leaving a widow, the bank might direct payment of a pension to his widow, or repay the contributions made with 4 per cent interest, computed half-yearly. The petitioner concedes that the bank's discretion did not permit denial of a pension for which an officer was qualified or discontinuance of a pension once granted. The plan provided for repayment of the contributions made by an officer in case of his voluntary resignation or dismissal, that the bank had no right to the pension fund, and that on discontinuance of the fund the contributions should be repaid to the contributors according to a schedule. The decedent's widow was paid a pension. Held, that there should be included in decedent's gross estate only an amount equal to decedent's contributions, plus 4 per cent interest computed half-yearly. Harry B. Sutter, Esq., and Harry D. Orr, Jr., Esq., for the petitioner. A. H. Moorman, Esq., for the respondent.
This case involves estate tax. A deficiency was determined in the amount of $24,156.87. The single question presented is whether the commuted value of annual payments being made to the decedent's widow from a pension fund set up by the decedent's employer, to which he and the employer made contributions during the period of his employment, is includible in the decedent's gross estate within the intendment of section 811(c) of the Internal Revenue Code.
A stipulation of facts was filed. We find the facts as so stipulated. Such facts as are considered necessary to discussion of the question presented are set forth, together with other evidence adduced, in our findings of fact.
FINDINGS OF FACT.
Emil A. Stake, who was born October 25, 1888, and was a resident of Illinois, died testate on December 19, 1944. The First National Bank of Chicago is executor of his will. He had been employed by the First National Bank of Chicago continuously from April 25, 1904, until his death. At death he was a vice president and cashier of the bank. During that time a pension plan was in operation at the First National Bank. Pursuant thereto he was required to contribute, and did contribute, 3 per cent of his salary to the fund. His total contributions were $14,893.20. During the same period the bank made annual contributions to the pension fund. From 1927 to May 1937, the bank's contributions equaled 6 per cent of participating employees' salaries and from May 1937 through 1944 they equaled 12 per cent of participating employees' salaries.
The pension fund was established in 1899 and was operated as a department of the bank until 1935, when it was established as a separate trust fund of the bank. It has so existed since that time. The pension plan has qualified as an exempt employees' trust under section 165 of the Internal Revenue Code.
Since January 1, 1945, Clara M. Stake, the decedent's widow, has received payments at the rate of $6,000 per year from the pension fund, less a certain proportion of benefits received by her under the Federal Insurance Contributions Act for 1945 and 1946. In those years she received $5,828.44 and $5,987.74, respectively.
On March 19, 1946, the executor filed a Federal estate tax return with the collector for the first district of Illinois at Chicago, and on that date paid to the collector $21,161.06, the amount of Federal estate tax shown due by the return. The return did not include in decedent's gross estate any amount on account of the pension payable to the widow under the pension fund.
In computing the deficiency the Commissioner included in the decedent's gross estate the sum of $68,931.63, stating:
* * * It is determined that the value of the pension to be paid to decedent's widow under the provisions of the Bank Pension Fund of the First National Bank of Chicago is properly includible in the decedent's gross estate under the provisions of section 811(c) of the Internal Revenue Code.
The rules and regulations of the pension fund, in effect on December 19, 1944, the date of the decedent's death, provided, in pertinent part, as follows: Officers and employees of the bank should contribute to the fund 3 per cent annually of the amount of their salaries (with the exception that employees performing nonbanking functions, such as building service employees and dining room help; also part time employees; also employees under 18 years of age and employees unable to pass the medical examination, were not required to contribute to the fund). Medical examination was required of officers and employees on entering the service. The bank, as part of its business and management, should decide the period when any officer or employee might receive an annuity or pension, but as a general rule no pension should be granted unless the officer or employee had completed not less than 15 years of service and had attained the age of 60 years. In the case of voluntary resignation or dismissal, payments made by an officer or employee should be returned, without interest. The question of cause for dismissal rested altogether with the bank and its action was to be conclusive evidence, both at law and in equity, that the dismissal or requirement of resignation was proper. At the age of 60 an officer or employee was permitted to retire or the bank might require retirement. On such retirement he was to receive the pension to which he might have then become entitled. On attaining the age of 65 he was to retire unless for special reasons the bank requested him to continue service and he consented. On retirement he was to receive the pension to which he might have then become entitled. If incapacitated by ill health of affliction before the age of 60, he was to be permitted to retire and take the benefits provided in the plan if evidence was given to the satisfaction of the bank; but in that case, when requested, he was to furnish a physician's certificate as to his health, and if his health was reestablished he was liable upon call to reenter the service of the bank, and if he omitted to do so upon call, his pension was to be discontinued.
Paragraph 7 of the plan read as follows:
7. In the case of the decease of an officer or employee who has not completed fifteen years of service in the bank and who leaves a widow or children, if the bank does not see fit to grant a pension on account of the shortness of the deceased's term of service, or for other reasons, the bank may direct that all payments made by him to this Fund shall be returned to his legal representatives with interest computed half-yearly at the rate of four per cent. per annum. If such officer or employee leaves no widow or children, his payments to this Fund with interest as stated, may be returned to his legal representatives. In the case of the decease of an officer or employee who has completed fifteen years of service in the bank and who leaves no widow or unmarried children under the age of eighteen years, his payments to this Fund, with such interest, may be returned to his legal representatives.
The pension granted to an officer or employee after November 10, 1944, was to be on the basis of one-fiftieth of his salary at the date of superannuation for each year of service up to 35 years, subject to a maximum of $6,000, plus 50 per cent of the amount so calculated above $6,000, and subject to a further maximum of $12,000 per annum. Pensions granted after August 13, 1943, were for life, and the pension of any widow was for life unless she remarried. The widow's pension was one-half the pension being received by her husband or which he, if not on pension, would have been entitled to receive if retired on pension as of the date of his death. Upon her death while in receipt of the pension leaving unmarried child or children under 18 years by the deceased officer or employee, her pension was payable to the child or children while under the age of 18 and unmarried. In its sole discretion the bank could make such payments to a trustee, guardian, or any other person deemed proper by the bank for the use and benefit of such child or children. The same provisions as to payments to children applied in case an officer or employee died leaving no widow but leaving children under 18, to the extent of half of the pension being received by the officer or employee.
The pension was not payable until it had been granted and its payment ordered by the bank, and even thereafter a pensioner was not entitled to have any part of capital or income of the bank set aside to provide for the pension. The pension was to be diminished by one-half of any amounts received by the pensioner pursuant to provisions of the Social Security Act (with certain exceptions not here important). Paragraphs 20, 21, and 22 of the pension plan provided as follows:
20. This Fund shall be managed and entirely controlled by the bank, and shall be invested as the bank may in its uncontrolled discretion, deem best but shall be maintained as a separate fund and shall not be or be deemed to be an asset of the bank, and no officer, employee or other person shall have any equitable or legal rights therein except only such rights as are set forth in Rules 6 and 22 hereof.
21. The bank may annul, alter, add to, or amend any of the Rules of this Fund, and may also require the officers and employees to increase their rate of contribution to it, should such a course appear necessary in the bank's discretion; or the bank may reduce the allowance herein provided for, provided, however, that in no event shall the bank have any power, authority or right whatsoever to annul, alter, add to, or amend the Rules of this Fund so as to create in or give to the bank, National Safe Deposit Company, First-Chicago Corporation or First-Trust Joint Stock Land Bank of Chicago, any reversionary interest whatsoever in this Fund.
22. While the administration of this Fund will, until further notice, be in accordance with the Rules of this Fund, it must be distinctly understood that the Rules of this Fund confer no vested rights, and that, as heretofore, every pension will be granted at the discretion of the bank and continued only during the bank's pleasure, provided, however, that the bank shall not, in any event, have any reversionary interest in this Fund, and if the bank shall elect to discontinue this Fund, which it may do in its uncontrolled discretion, or if this Fund is discontinued for any reason beyond the control of the bank, this Fund shall be distributed, with priorities in the order named, in a manner as follows:
1. The officers and employees of the bank not in receipt of a pension or entitled to receive a pension by reason of both age and length of service, as of the time of such discontinuance of this Fund, shall be repaid the amounts paid into this Fund by said officers and employees, respectively, without interest.
2. Provision, by the purchase of annuities or other suitable means, shall be made for the payment of pensions granted and effective or to which any officer or employee by reason of both age and length of service would be entitled to receive at the time of such discontinuance of this fund.
3. Any balance in this fund shall be distributed to the officers and employees of the bank not in receipt of a pension or entitled to receive a pension by reason of both age and length of service, in the respective proportions that the respective amounts paid into this Fund by each of said officers and employees not in receipt of or entitled to receive a pension as aforesaid, plus interest compounded half-yearly at the rate of 4 per cent. per annum, bear to the total amount paid into this Fund by all of said officers and employees not in receipt of or entitled to receive a pension as aforesaid, plus interest compounded half-yearly at the rate of 4 per cent. per annum.
The manner, time and amounts of any distribution hereunder, as determined or approved by the person acting as president of the bank at the time of such discontinuance of this Fund, or, in the event of his absence or disability, by the person holding the position of Cashier of the bank at the time of such discontinuance, shall be conclusive.
In the event that the amount of this fund, at the time of any such discontinuance, is not sufficient to make full provision for the distribution within any class, as reached progressively in the order of priorities hereinabove set forth, the person determining or approving such distribution, as aforesaid, shall have authority to adjust and prorate equitably the distribution within the class in respect of which the amount of the fund does not permit full distribution, provided, however, that, in the event the amount of the fund is not sufficient to make full provision for the distribution set forth in ‘(2)‘ above, the person determining such distribution, as aforesaid, shall have authority, in his sole discretion if he shall so elect, to ignore the priority between ‘(1)‘ and ‘(2)‘ above and include officers and employees then in receipt of a pension or entitled to receive a pension by reason of both age and length of service (or the wives or minor children of any such deceased officer or employee, in the discretion of such person distributing the fund) in the distribution under ‘(1)‘ above, with appropriate adjustments in respect of amounts theretofore paid in connection with any pension effective and existing prior to any such discontinuance of this fund.
Pensions terminated if the pensioner became bankrupt, had a judgment entered against him, or was convicted of a felony or misdemeanor.
Decedent's widow, Clara M. Stake, reported $446.80 of the pension received by her as taxable income in her Federal income tax returns for each of the years 1945 and 1946. For 1947 she reported $2,029.38. On January 4, 1941, attorneys for the First National Bank of Chicago inquired of the Bureau of Internal Revenue whether pensions paid to widows under the bank's pension fund were taxable as income. On January 30, 1941, the Bureau responded that amounts paid by the bank pension fund to surviving widows were taxable in the hands of the recipients to the same extent as to a retired officer or employee.
OPINION.
Disney, Judge:
The parties specifically agree that our question is as follows: Is the commuted value of annual payments to decedent's widow from a pension fund established by decedent's employer, the First National Bank of Chicago, to which fund the decedent and his employer made annual contributions during the 40-year period of decedent's employment, includible in decedent's gross estate under section 811(c) of the Internal Revenue Code?
The respondent states his position to be that, by virtue of a contract between the decedent and his employer, his widow at his death, through her survivorship, became entitled to receive a pension for lifetime or until remarriage, and that the value of such right at the date of decedent's death is includible in his estate under section 811(c) of the Internal Revenue Code. The respondent has determined such value to be $68,931.63 and the petitioner does not disagree with that value.
The respondent argues that here the pension plan, embodied in published rules and holding out an inducement for continued employment, constituted an agreement; that, though language appears in the plan to the effect that employees had no vested rights in the fund, they in fact, as shown by other language in the plan, possessed vested rights; that the bank had no reversionary interest in the fund; and that it was payable under various circumstances to the employees or beneficiaries. In maintaining that the valuation of the benefits payable to the decedent's widow is includible in his gross estate, the Commissioner relies primarily upon Commissioner v. Wilder's Estate, 118 Fed.(2d) 281; Commissioner v. Clise, 122 Fed.(2d) 998; and Mearkle v. Commissioner, 129 Fed.(2d) 386. These cases, in general, involve joint and survivorship annuities purchased by the decedent.
The petitioner states that it is not contended that the bank in its discretion could arbitrarily refuse to grant a pension to an employee qualified for one, or arbitrarily discontinue or alter a pension once granted. The petitioner, moreover, concurs in the respondent's general conclusion that the pension plan created an enforceable contract and that to the extent that it created rights in third party beneficiaries it is enforceable by them, but says that the nature of such rights must be examined. It is, therefore, argued that Emil A. Stake had during life a vested interest only in the return of his contributions, $14,893.20, if his services were terminated voluntarily or involuntarily, and the right to a distribution of the fund in the event of termination of the plan in accordance with the rules then in existence. Petitioner argues that Emil A. Stake never had a property interest in the pension fund and that he did not make a transfer of property and retain enjoyment thereof during his life, within the ambit of section 811(c) of the Internal Revenue Code. Reliance is placed largely upon Estate of Edmund D. Hulbert, 12 B.T.A. 818; G.C.M. 17817, XVI-1 C.B. 281; and Dimock v. Corwin, 19 Fed.Supp. 56, and petitioner argues that in the Hulbert case, involving compulsory contributions to a pension fund similar to that here involved, we held that nothing could be included in Hulbert's estate because of the pension; that the Commissioner acquiesced therein; that in G.C.M. 17817 the Bureau of Internal Revenue considered a pension plan under which a decedent designated a beneficiary who received the death benefit, but where a company reserved the right to withdraw or modify the plan through guaranteeing that death benefits would be paid in accordance with the plan in effect at the date of employee's death, the decision of the company to be conclusive in the interpretation or administration of the plan; and that the conclusion of the Bureau of Internal Revenue was that the decedent's interest in the death benefit prior to his death was nothing more than an expectancy, not a property right, and, therefore, was not includible in his gross estate. In Dimock & Corwin, supra, the petitioner urges, the pension plan was more favorable to respondent's position than that here involved, the employee having a right to designate and change the beneficiary, yet nothing was included by the court in the decedent's gross income on account of the widow's expectation of receiving a pension, the court concluding that the right to designate a beneficiary did not constitute property and stating as to the death benefit that the decedent was possessed of nothing during his life save the capacity to nominate (with power of revocation) a person to whom, upon his death, the company could grant a death benefit, but that he could not control the capacity of a nominee to qualify as a recipient by surviving him. Petitioner points out that the Commissioner did not appeal on this point in the Dimock case from a holding that the death benefit was not includible in employee's gross estate.
Did the decedent possess vested rights or a mere expectancy? Examination of the provisions of the pension plan reveals that the decedent, as an employee, was required to contribute to it, that the bank should decide when the employee might receive an annuity or pension, but that, as a general rule, no pension should be granted unless the employee had completed 15 years service and attained the age of 60 years. Petitioner, at his death, had not attained such age, but had served more than 15 years. His widow, under paragraph 13 of the pension plan, was entitled to receive one-half the pension which her husband was receiving as a pensioner or which her husband, if not on pension, would have been entitled to receive if retired on pension as of the date of his death, such pension to cease on her remarriage. Under paragraph 22, if the pension fund should be discontinued, it would be distributed, and an employee ‘not in receipt of a pension or entitled to receive a pension by reason of both age and length of service * * * shall be repaid the amounts paid * * * ‘ by him, without interest; provision, by annuity or otherwise, should be made ‘for the payment of pensions granted and effective or to which any officer or employee by reason of both age and length of service would be entitled to receive * * * ‘; and, lastly, any balance should be distributed to officers and employees ‘not in receipt of a pension or entitled to receive a pension by reason of both age and length of service‘ in general, in the proportion of the contributions of each employee so classified to the contributions of all in such class.
Reviewing the above provisions, and aside from discretion in the bank elsewhere appearing in the plan, we find that the decedent, having died before the age of 60, was not entitled to a pension under any provision of the plan, and, so far as the record shows, was not receiving a pension at the time of his death, and, therefore, his widow was entitled to none, though in fact she later received a pension. In short, though the plan reveals provisions for widows' pensions, none appear under the facts here shown, and the payment to decedent's widow was not by virtue of any right thereto, either in her, or in him at the time of his death, under the facts and the provisions of the plan. So far as we can see in the provisions of the plan, the decedent, not having already received a pension, had to live until 60 years of age before he could be assured that his widow would receive one. We can discover no right in him prior to death that his wife should receive the pension she was later actually paid. It appears to have been granted within the discretion lodged in the bank under the plan. In this we find not more than an expectancy on his part. His right, prior to age 60 but after 15 years service, even to the return of contributions made by him, does not clearly appear in the plan, but since paragraph 7 provided, in the case of an employee who had not completed 15 years service but died leaving a widow, that if he had not been granted a pension his contributions, with 4 per cent interest computed half-yearly, might be returned to his legal representatives, it appears that the decedent, having completed 15 years service, should be regarded in an equally advantageous position; and since, as above seen, the petitioner does not contend that the bank could arbitrarily refuse a pension to a qualified employee, we think that a fair interpretation of the plan indicates that the decedent had a right to the return of his contributions to his legal representatives, and 4 per cent interest, computed half-yearly. Beyond this the plan does not go, and we discern therein nothing unreasonable in the fact of contributions by the employee without positive assurance of a pension before age 60, or affirmative right that his widow, under such circumstances, receive a pension, but only an expectancy thereof, and, we may here assume, a right to such pension if he survive to 60 years; also a right to repayment of contributions under certain circumstances. The contributions were undoubtedly consideration, but not necessarily consideration for the rights asserted by the respondent. In our view, they were consideration for the limited rights to repayment and some expectancy, both of a pension before 60 years and a pension to the widow.
In addition to the conclusions above expressed, in our view, the authorities above named as relied upon by the petitioner compel the holding that the decedent had at most an expectancy of a pension to his widow. The facts in Dimock v. Corwin, supra, and G.C.M. 17817 were not so strong in support of petitioner's view as those here involved, for in each of those instances the employee had the right to designate the beneficiary, whereas the decedent here had no such right. The plan itself designated the beneficiaries as widow and/or children. Nevertheless, both the court in Dimock v. Corwin and the Bureau in the above G.C.M. took the view that the decedent's interest was nothing more than expectancy, not a property and not includible in his gross estate. We think that conclusion sound. The opinion in the Hulbert case does not indicate whether the decedent could designate the beneficiary.
The cases primarily relied on by the respondent are not helpful here, for they involved joint and survivorship annuities, purchased by the decedent. The holding in those cases, in effect, that the decedent had a property interest and that he conveyed it is soundly based in the fact of purchase of the annuities by him. Here the decedent made only a limited contribution, under a plan limiting his rights as above set forth, resulting, in our view, in no property rights and no transfer. The respondent distinguishes the Hulbert case on the ground that it involved a contention that there was insurance, which the opinion did not adopt. This fact, on the face of that opinion, makes the case of limited application here. Nevertheless, the opinion does say that the contributions which Hulbert was compelled to make to the fund created no vested right in him or his beneficiaries to receive a pension, nor did it impose any contractual obligation upon the trustees to pay a pension, but that it was entirely a matter of choice by the trustees. It was held, however, that there was obligation arising from decedent's contributions to return the contributions with compound interest if a pension should not be paid, and such amount was found includible in decedent's gross estate. Obviously, such conclusion, after the denial that there was insurance, was based upon a property right in decedent and transfer thereof, under section 402(c) of the Revenue Act of 1941, predecessor of section 811(c). The petitioner here cites the Hulbert case as ‘four square on the facts in the instant case‘ and urges that the provisions of the plan there involved, and here at hand, are on all fours, and only queries as to the applicability, at this time, of the Hulbert case so far as it includes in gross estate the amount of decedent's contributions, and interest thereon, since the ruling in E. T. 18, 1940-2 C.B. 285. Therein it is stated that amounts payable under the Social Security Act to the widow, children, or parents of a ‘fully insured‘ or ‘currently insured‘ decedent who died after January 1, 1940, are not includible in gross estate under section 811, examination of that act showing that the decedent had no control over the designation of the beneficiaries or the amounts payable directly to them, and the decedent having, it is held, no property interest in the Old Age & Survivors Insurance Trust Fund. E.T. 18 specifically states that it does not affect E.T. 10, C.B. 1937-2, 469, relating to payments under section 203 of the Social Security Act to the estate of a decedent dying prior to January 1, 1940. E.T. 10 holds that such payments to the estate were includible at that time in gross estate. Paragraph 7 of the pension plan, as above seen, provides for payments to the decedent's legal representatives of his contributions, plus interest, in case of the decease of an employee without completion of 15 years service; and we have above applied the same rule in the case of the decedent who had completed such 15 years service. Neither the petitioner nor the respondent argues that the Social Security Act and its provisions are applicable here, and nothing indicates to us that the statutes are such as to cause application under the circumstances here involved. The pension plan provides specifically that upon voluntary resignation the employee shall be returned his contributions, without interest. To that extent he had dominion and control over such contributions, a property interest. Under the Hulbert case and the general considerations above examined, we conclude, as was in that case found, and we hold that there is includible in decedent's gross estate only the amount of contributions made by him, with 4 per cent interest, computed half-yearly until the date of his death.
Decision will be entered under Rule 50.