Opinion
Docket No. 33809.
1952-12-12
ESTATE OF FRANK B. FRY, DECEASED, FREDERICK E. FRY, Administrator, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Francis X. McCormick, Esq., for the petitioner. John E. Mahoney, Esq., for the respondent.
Where an employee received the total distributions payable to him by reason of his participation in an employees' pension trust in the taxable year 1947 and reported the sum received as capital gain, and thereafter the employee continued to render services and receive his regular salary of $36,500 per year until his death in 1949, held, that the employee was not separated from the service of his employer within the meaning of section 165(b) of the Internal Revenue Code and the amount of the settlement is taxable as ordinary income, the employee having made no contributions to the trust. Francis X. McCormick, Esq., for the petitioner. John E. Mahoney, Esq., for the respondent.
The respondent determined a deficiency in income tax of the petitioner's decedent, Frank B. Fry, for the calendar year 1947 in the amount of $37,058.86, all of which is here in dispute. The sole issue for our decision arises from the conflicting interpretations placed by the parties on the language ‘separation from the service‘ as it is used in section 165(b) of the Internal Revenue Code, which deals with employees' pension trusts.
FINDINGS OF FACT
The facts stipulated by the parties are found accordingly.
Frank B. Fry, the decedent, resided during his lifetime in Newark, New Jersey, and filed his income tax return for the taxable year 1947 with the collector of internal revenue for the fifth district of New Jersey. His income tax return for the taxable year 1948 was filed with the collector for the same district. For the taxable period January 1, 1949 to March 18, 1949 (date of death of the decedent), an income tax return was filed for the decedent by Frederick E. Fry, the administrator of the decedent's estate, with the collector of internal revenue for the fifth district of New Jersey.
The decedent died intestate on March 18, 1949, and on April 12, 1949, letters of administration were issued to the decedent's son, Frederick E. Fry, who is still acting as administrator of the estate of the decedent.
From January 1, 1947, through the date of his death, the decedent owned 50 per cent of the issued and outstanding common stock of the H. A. Wilson Company of Newark, New Jersey, and was employed by that company in an executive capacity.
On December 28, 1942, the H. A. Wilson Company adopted a pension plan for the benefit of all participating employees, including the decedent. From 1944 through 1947 decedent trained four employees, one for executive work and three in the work of bi-metal fusion. Each of these four men were trained by the decedent for the ultimate purpose of replacing him in the service of the H. A. Wilson Company.
When the employees' pension trust was first established by the H. A. Wilson Company in 1942, it was determined by the trustees that the retirement date of the decedent would be the anniversary date of such trust nearest his seventieth birthday. On December 26, 1947, the decedent filed with the trustees of the pension plan a certification that he had reached the retirement age of 70 years. This certification acknowledged the receipt of the sum of $65,481.50 and released the trust and the trustees from all claims growing out of any rights which he might have as a participant in the pension plan.
In his income tax return for the taxable year 1947, the decedent included in his income one-half of the lump sum payment of $65,481.50, or $32,740.75, which in the computation of alternative tax was taxed as capital gain. The decedent never made any contribution to the pension plan of the H. A. Wilson Company.
After December 26, 1947, and until his death on March 18, 1949, the decedent continued to receive the same compensation from his employer, the H. A. Wilson Company, that he had received during the taxable year 1947, or $36,500 a year.
After December 26, 1947, the decedent devoted less of his time to the activities of the H. A. Wilson Company and spent increasing amounts of time at his winter home in Florida and at his farm and hunting lodge in Canada. In 1948 the decedent made a trip to Florida lasting for at least 6 weeks. Thereafter he made frequent visits to the plant of the H. A. Wilson Company.
The decedent was never separated or retired from the service of the H. A. Wilson Company in December 1947 within the meaning of section 165(b) of the Internal Revenue Code, and continued to render services and draw his usual salary of $36,500 per year until his death in March 1949.
OPINION.
HILL, Judge:
Section 165(b) of the Internal Revenue Code provides that an amount distributed or made available by employees' trust to an employee shall be taxable as though it were an annuity, the consideration for which is the amount contributed by the employee. We have found as a fact that the decedent, Frank B. Fry, never made any contribution to the pension trust involved here, so that the tax would apply to the whole sum of $65,481.50 distributed to him in the taxable year 1947. However, section 165(b) provides further that if the total distribution payable to the employee is paid within one taxable year of the distributee on account of the employee's separation from service, then the amount of distribution to the extent that it exceeds any contribution by the employee shall be considered as a gain from the sale or exchange of a capital asset held for more than 6 months and accordingly taxable at capital gain rates.
The facts before us present a question of initial impression. We are called upon to apply the language ‘on account of the employee's separation from the service‘ as used in section 165(b) of the Code.
SEC. 165. EMPLOYEES' TRUSTS.(b) TAXABILITY OF BENEFICIARY.— The amount actually distributed or made available to any distributee by any such trust shall be taxable to him, in the year in which so distributed or made available, under section 22(b)(2) as if it were an annuity the consideration for which is the amount contributed by the employee, except that if the total distributions payable with respect to any employee are paid to the distributee within one taxable year of the distributee on account of the employee's separation from the service, the amount of such distribution to the extent exceeding the amounts contributed by the employee shall be considered a gain from the sale or exchange of a capital asset held for more than 6 months. * * *
Petitioner here contends that the decedent was actually retired from the service of the H. A. Wilson Company in December 1947 and hence properly reported the lump sum settlement of his rights under the pension trust of the H. A. Wilson Company at capital gains rates. We can not agree with the petitioner. We have found as a fact that the decedent spent several years training new employees in the line of work which he had been doing for the H. A. Wilson Company and that after December 1947 the decedent spent less and less of his time in the performance of his duties for that company. During the same period the decedent spent greater periods of time in Florida and in Canada in the pursuit of his hobbies of hunting and fishing. However, any probative value of these facts has been weakened, if not displaced altogether, by the fact that the decedent continued to draw his regular salary of $36,500 per year from the H. A. Wilson Company up to the time of his death. The petitioner's sole witness, who served as attorney to the decedent and whose only connection with the H. A. Wilson Company was as counselor to the committee who administered its pension trust, when asked to explain the continued receipt by the decedent of his regular salary replied: ‘A mistake, I imagine.‘
In searching the meaning of the clause in question, the report of the Senate Finance Committee dealing with the section of the Code in question, is informative. See Senate Finance Committee Report No. 1631, 77th Cong., 2d Sess., wherein it was stated at section 164 as follows:
The provisions of the House bill with respect to section 165(b), concerning the taxation of the beneficiary of a trust which meets the requirements of section 165(a), have not been changed except to take care of the situation where an employee receives the total distributions that he is entitled to under the plan in 1 taxable year on account of his separation from the service. In such a case, it is provided that the amount of such distributions to the extent that it exceeds the amounts contributed by the employee shall be considered a gain from the sale or exchange of a capital asset held for more than 6 months. For example, if under a profit-sharing trust, the total distributions to which an employee is entitled are paid to the employer, or to his widow if he dies during the course of his employment, the amount received by the employer or widow to the extent it exceeds the employee's contributions will be considered a gain from the sale or exchange of a capital asset held for more than 6 months.
The continued unexplained receipt by the decedent of his regular salary of $36,500 per year can lead us to no other conclusion than the decedent had not severed his connection with his employer, the H. A. Wilson Company. In order to obtain the benefits permitted under section 165(b) of the Internal Revenue Code, the decedent must have been retired or severed his connection with his employer within the year in which he received the lump sum settlement of his rights under the pension fund. Such is not here the case. We, therefore, must hold for the respondent.
Reviewed by the Court.
Decision will be entered for the respondent.