Miller v. Commissioner , 14 T.C. 657 ( 1950 )

Estate of William S. Miller, Deceased, the Northern Trust Company, Former Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent

Miller v. Commissioner

Docket No. 19505

United States Tax Court

14 T.C. 657; 1950 U.S. Tax Ct. LEXIS 218;

April 21, 1950, Promulgated

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Decision will be entered under Rule 50.

Decedent was paid an annual pension of $ 15,000 upon his retirement, pursuant to the terms of a compulsory pension plan established by his employer to which he and his employer had regularly contributed. Under the plan an annual pension in the amount of $ 3,000 was payable to decedent's wife upon his death. Decedent possessed no election under the plan in respect to the naming of his wife as surviving pensioner or the amount of the pension she might receive upon his death. The rules and regulations of the plan provided that the pensions payable to decedent and his wife, as pensioners, were subject to reduction in amount at any time and to elimination in the event of various contingencies, such as his unauthorized acceptance of a position with another like employer, bankruptcy, voluntary assignment, conviction for a felony, or liability for a judgment or decree for the payment of money. Held, that the pension which was payable to the decedent's wife upon his death did not represent an interest in property of which the decedent had made a transfer intended to take effect in possession or enjoyment at or after his death within the meaning of section 811 (c) of the Internal Revenue Code, and, therefore, the commuted value of the wife's pension is not properly includible in the decedent's gross estate.

Leland K. Neeves, Esq., for the petitioner.

A. H. Moorman, Esq., for the respondent.

Arundell, Judge.

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ARUNDELL

Respondent has determined a deficiency in estate tax in the amount of $ 2,809.81.

The sole question presented is whether the commuted value of annual payments made to decedent's widow from a pension trust established by decedent's employer is properly includible in decedent's gross estate under the provisions of section 811 (c) of the Internal Revenue Code.

Other minor adjustments made by respondent to the value of decedent's gross estate are not challenged by the petitioner. The parties are also agreed that petitioner will incur and pay additional administrative expense, attorneys' fees, and expenses of litigation, and that the determination and allowance of the allowable deduction for such expense will be made under Rule 50.

The facts have been stipulated by the parties and, in so far as material to the issue herein, they are set forth in our findings of fact.

FINDINGS OF FACT.

The decedent, William S. Miller, was born on September 27, 1873. He died testate on June 1, 1945, and at that time was a resident of the Village of Winnetka, Cook County, Illinois. He was survived by his wife, Mary P. W. Miller, aged 63, who was the sole devisee and legatee under his will.

The Northern Trust Co. was duly appointed as Miller's executor on July 27, 1945, and continued in that capacity until discharged by court order on December 5, 1946. The respondent was never notified of this discharge. On August 26, 1946, the Northern Trust Co. filed a Federal estate tax return for Miller's estate with the collector of internal revenue for the first district of Illinois, and on that date paid the collector the sum of $ 22.93 representing the Federal estate tax shown by the return to be owing.

Miller was employed by the Northern Trust Co. continuously from January 20, 1900, until the date of his retirement on December 31, 1944. At the time of his retirement and for many years prior thereto, he was vice president and general counsel of the bank.

The pension fund of the Northern Trust Co. was first established on April 1, 1913. The Northern Trust Co. of Chicago Officers' and Employes' Pension Trust, hereinafter referred to as the pension trust, was established on May 31, 1929, replacing the prior pension fund.

Miller became a member of the pension fund upon its establishment on April 1, 1913, and continued as a member thereafter until the establishment of the pension trust on May 31, 1929, and continued as a member of the pension trust at all times thereafter until his retirement and death.

Over his period of service with the bank and prior to retirement, Miller contributed the total sum of $ 8,564.60 to the pension fund and the pension trust, which was the full amount he was required to contribute.

During the entire time of the existence of the pension fund and of the pension trust, the Northern Trust Co. contributed thereto. From the time of the establishment of the pension fund in 1913 to May 18, 1926, the Northern Trust Co. was required to contribute 5 per cent of the salaries of the participating officers and employees, excepting that this percentage was computed on only the first $ 4,000 of such salaries, respectively. Effective as of May 18, 1926, and thereafter, and after the establishment of the pension trust on May 31, 1929, and thereafter to January 1, 1944, the above percentage was computed upon the first $ 10,000 of such salaries, respectively. Effective January 1, 1944, and thereafter to and until decedent's retirement, the Northern Trust Co. was required to contribute 6 per cent annually of the whole amount of such salaries, respectively. The Northern Trust Co. made all of the contributions so required to be made.

The rules and regulations of the pension trust so established on May 31, 1929, were amended from time to time in accordance with the provisions of the trust indenture creating the pension trust. The rules and regulations in effect as of December 31, 1944, the date of Miller's retirement, contain the following pertinent provisions:

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5. (a) Every officer and employe shall contribute annually until he becomes a pensioner, a sum equal to three per centum (3%) of his salary, payable in equal monthly installments, each installment to be deducted from the monthly pay and credited to the Pension Trust.

(b) The Bank shall contribute to it six per centum (6%) annually of the amount of such officers' and employes' salary, payable in monthly installments and credited to the Pension Trust.

(c) Whenever any officer or employe shall have received a total salary entitling him to the maximum annual pension hereinafter fixed by Rule 15 (c), he shall no longer make any further contributions to the fund nor shall the Bank make any further contributions to the fund on his behalf.

* * * *

8. All officers and employes, except those who may be excused from so doing by the Board of Directors, will be required to contribute to this Pension Trust.

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9. (a) In case of resignation or dismissal of an officer or employe from the service of the Bank, all payments made by him to the Pension Trust * * * shall be returned, plus interest on said payments to January 1, 1936, at the rate of three per centum (3%) per annum and thereafter at the rates allowed from time to time in the Bank's Savings Department, all interest to be compounded semi-annually.

(b) In case of the death of an officer or employe a member of this Pension Trust, whose term of service in the Bank has been less than fifteen years, there shall be paid to such beneficiary or beneficiaries and in such proportions between them as he may designate in the latest instrument in writing delivered to the representative of the Trustees, the amount which such deceased officer or employe had contributed to the Pension Trust, together with the accumulations of interest on the said amount at the rate of three per centum (3%) per annum, compounded semi-annually * * *. In case there is no beneficiary designated or in existence at the death of such officer or employe, payment will be made as follows:

First, in accordance with the terms of the Last Will and Testament of the officer or employe.

Second, in case the Trustees have no notice of a Will of such deceased officer or employe within sixty (60) days after his death, then to the heirs-at-law of the officer or employee * * *.

10. An officer or employe on attaining the age of sixty years may be permitted to retire, or the Board of Directors may require him to retire, and in either case, if he shall have completed not less than fifteen years of service in the Bank, his pension shall be in an amount which is the actuarial equivalent of the pension which he would receive had he retired at age sixty-five.

11. An officer or employe on attaining the age of sixty-five years shall retire from the service, unless, for special reasons, the Board of Directors may wish him to continue in the service of the Bank and he consents thereto, in which event he shall retire from the service at such time thereafter as he or the Board of Directors may elect and upon such retirement he shall receive such pension as is herein provided if such officer or employe shall have completed not less than fifteen (15) years of service in the Bank.

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12. An officer or employe who, after fifteen years of service, shall be incapacitated by accident or ill health, evidence thereof being given to the satisfaction of the Board of Directors, shall be permitted to retire and take the benefits provided for in these Rules and Regulations. If such incapacity occur prior to fifteen years of service, such officer or employe shall have returned to him his individual contributions * * * with interest at three per centum (3%) per annum, compounded semi-annually, added * * *.

13. In case an officer or employe becomes entitled to a pension by reason of having become incapacitated by accident or ill health or in case an officer or employe becomes entitled to a pension upon retirement, and in the further event that it is the mutual desire of such officer or employe and the Bank that he continue in the service of the Bank upon such terms and conditions as may be agreed upon, not, however, a continuation of the regular service as theretofore performed, then a pension may be granted such officer or employe notwithstanding the fact that he may continue in the service of the Bank.

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16. Officers and employes who have been retired under these Rules and Regulations, and who have been in the service of the Bank for fifteen years or more, shall, subject to Rules Nos. 29, 31 and 32, receive a pension for life.

17. The widow of a deceased pensioner, or the widow of a deceased officer or employe who was a member of this Pension Trust at the time of his death and whose term of service in the Bank has been fifteen years or more, shall receive from the time of his death one-half of the pension which such pensioner was receiving at the time of his death, or one-half of the pension to which such deceased member would have been entitled if the date of his death were considered as the date of his retirement, as the case may be, not exceeding, however, the sum of Three Thousand Dollars ($ 3,000) per annum.

The pension shall cease on her remarriage, and from and after her death or remarriage, if the deceased pensioner (officer or employe) has any unmarried children then living who are under the age of twenty-one years, her pension shall be paid in equal shares to such children from time to time being under the age of twenty-one (21) years and unmarried, or to guardians or trustees for them, or it may be expended on their behalf as the Trustees of the Pension Trust may think best until they respectively reach the age of twenty-one years or marry prior to reaching such age, at which time the pension to each such child shall cease. If an officer or employe is in receipt of a pension at the time of his death, and leaves a widow, or unmarried children who are under the age of twenty-one years, the period for which he shall have received such pension shall be deducted from the period during which the Pension shall be paid to his widow or children, or both, i. e., from his term of service.

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24. Any male officer or employe who is married shall have the option (provided written notice of his desire so to do shall have been served on the Trustees not less than five years before retirement or prior to January 1, 1945) of receiving in place of the pension for himself, his wife and his minor children, if any, a joint pension for himself and his wife and the survivor for life in an amount which is the actuarial equivalent of the pension herein provided for himself and his wife. If such option is so exercised, such officer or employe shall be required to accept such joint pension upon retirement if his wife is then living.

25. In the event of a pensioned officer or employe taking employment in another institution of like character, the permission of the Bank must be obtained or his pension will be forfeited.

26. All pensions shall cease on bankruptcy or voluntary assignment, or on conviction of the pensioner for felony, or upon any judgment or any decree for payment of money of any court of law or equity being made against any pensioner. Provided, always, that the Trustees of the Pension Trust may, in their uncontrolled discretion, make a new grant to any person whose grant shall have ceased for any of the reasons aforesaid.

And in case of bankruptcy, voluntary assignment, conviction of the pensioner for felony, or the entry of any judgment or decree for payment of money, the Trustees may themselves use the pension in whatever way they deem best for the benefit of the pensioner, or his family or any person that may be dependent upon such pensioner.

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29. The Bank reserves the right to terminate the Pension Trust at any time in the discretion of the Board of Directors. In case of such termination by the Bank or in any other manner, the balance in the Pension Trust shall be distributed as follows:

First, provision shall first be made for the continuation of all pensions then being paid to pensioners (including the future pensions to wives or minor children of the pensioners) either through the purchase of annuities or in such other manner as the Trustees deem best.

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31. These Rules and Regulations may be changed or entirely new rules and regulations substituted therefor or the rates of contribution by the Bank or officers and employes may be increased or reduced or the allowances herein provided for may be reduced or increased at any meeting of the Trustees by a vote of three of the Trustees, subject to the approval of the Board of Directors of The Northern Trust Company, provided, however, that notice of any change shall be posted on the bulletin boards of The Northern Trust Company for ten days before it becomes operative, and provided further that no change shall be made which shall take away from any contributor to the Pension Trust any right herein given him to the return of his own contribution.

32. In no event and under no circumstances, whether by change in the Rules and Regulations, termination of the Pension Trust, or otherwise, shall any part of the trust corpus or income thereon be used for, or diverted to, purposes other than the exclusive benefit of officers, employes, and beneficiaries prior to the satisfaction of all liabilities of the Pension Trust with respect to the officers, employes, and beneficiaries.

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35. The Pension Trust hereby created shall be administered by the Trustees from time to time appointed and acting hereunder, in accordance with the foregoing Rules and Regulations, and the rights, either legal or equitable, to the officers, employes, or beneficiaries of and under this Pension Trust shall at all times be subject to the said Rules and Regulations and the administration thereof by the said Trustees. The acts and discretions of the Trustees hereunder in administering the said Pension Trust hereunder shall be controlling and conclusive on all of the officers, employes, or beneficiaries having any rights, either legal or equitable, therein.

* * * *

This pension trust has qualified as an exempt employee's trust under section 165 of the Internal Revenue Code.

The provisions of rule 24 have been construed by the bank to mean that any election made by the employee will not affect the pension otherwise payable to the widow or children and that any pension payable to the widow or children as a result of the employee's having executed such election is in addition to the pension otherwise payable to the widow or children. Decedent never exercised the right of election given to him under rule 24.

Upon retirement, Miller became entitled to receive a pension of $ 1,250 a month. He received monthly payments for January, February, March, April, and May, 1945, aggregating $ 6,250, which was $ 2,314.60 less than the amount of his total contributions to the pension fund and pension trust.

Pursuant to rule 17, decedent's widow became entitled upon his death to a pension of $ 3,000 a year, payable in equal monthly installments of $ 250, and since decedent's death his widow has been receiving this pension.

No amount was included in decedent's gross estate on account of the pension payable to decedent's widow under the pension trust in the estate tax return filed by the Northern Trust Co. as executor.

In computing the deficiency in Federal estate tax as set forth in the notice of deficiency, respondent included in decedent's gross estate the sum of $ 25,854.50, which, the parties agree, was the value at the time of decedent's death of the pension payments to be made to decedent's widow.

OPINION.

Petitioner here challenges the respondent's determination that the commuted value of the annual pension payable to the decedent's widow is includible in the decedent's gross estate under section 811 (c) of the Internal Revenue Code. Specifically, the question is whether or not the pension payable to decedent's wife under the pension trust constitutes an interest in property of which the decedent had by trust or otherwise made a transfer "intended to take effect in possession or enjoyment at or after his death."

The word "Transfer" as used in the statute includes the transfer of property procured through expenditures by the decedent with the purpose, effected at his death, of having it pass to another. Chase National Bank v. United States, 278 U.S. 327">278 U.S. 327. The statute deals with property not technically passing at death but with interests theretofore created, and subjects to tax "inter vivos transfers that are too much akin to testamentary dispositions not to be subjected to the same excise." The measure of the tax is the value of the property at the time when death brings it into enjoyment. Helvering v. Hallock, 309 U.S. 106">309 U.S. 106.

Respondent rests his determination on the principle established in Commissioner v. Wilder's Estate, 118 Fed. (2d) 281; certiorari denied, 314 U.S. 634">314 U.S. 634; Commissioner v. Clise, 122 Fed. (2d) 998; certiorari denied, 315 U.S. 821">315 U.S. 821; and Mearkle's Estate v. Commissioner, 129 Fed. (2d) 386. In each of those cases, the decedent purchased, for a lump sum, joint and survivor annuity contracts and at the time of purchase irrevocably designated the surviving annuitants. In all three cases the courts held that the commuted value of the survivor's annuity was includible in the decedent's estate under section 811 (c). The doctrine of those cases was best expressed in the opinion of the Circuit Court of Appeals for the Ninth Circuit in Clise v. Commissioner, supra, which stated that:

* * * The practical effect of the annuity contracts was to reserve to Mrs. Clise the enjoyment of the property transferred and to postpone the fruition of the economic benefits thereof to the second annuitants until her death. In the light of the Hallock case the transfers were "too much akin to testamentary dispositions not to be subjected to the same excise."

The principle announced in those cases has been extended by us to cases where the survivorship rights were not acquired by the decedent through a cash purchase, but incident to an employment contract. In Estate of William L. Nevin, 11 T. C. 59, we held that the value of the decedent's gross estate should properly include the commuted value of payments which were payable to the decedent's widow under a contract whereby decedent agreed to resign as the managing trustee of certain trusts in return for certain fixed payments payable to him over a 10-year period, with the proviso that if he died during such period the payments were to be continued to his widow. The transaction whereby decedent's wife received certain sums of money following his death was held to constitute a transfer intended to take effect in possession or enjoyment at or after his death and to bring the case within section 811 (c). In Estate of William J. Higgs, 12 T. C. 280, the decedent was employed by an oil company which purchased an annuity contract for him upon retirement, under which decedent had the election to accept a smaller annuity for himself and thereby obtain a survivorship annuity for his wife. We held that the decedent's exercise of this election effected a transfer to his wife of an annuity, the value of which was includible in his gross estate under section 811 (c).

While it is true that the instant case presents points of similarity to the cited cases, there are a number of material distinctions herein which in our opinion call for a different conclusion.

At the outset, it should be borne in mind that the annuity contracts purchased by or for the benefit of each of the decedents in the cases cited above vested in both the decedent and the "second annuitants" fixed and enforceable property rights which were thereafter subject neither to revocation nor modification by either of the principal parties to the contracts. Such was clearly not the case in respect to the pension rights acquired by either the decedent or his wife under the pension trust of the Northern Trust Co. here involved.

Although decedent's participation in the pension trust was compulsory under rule 8 of its rules and regulations, it is clear that he possessed no property rights under the pension trust prior to reaching the age of 65 other than the right to have his contributions, plus interest, refunded to him upon his resignation or dismissal from his position with the bank. Nor were his pension rights enhanced to any great extent by his actual retirement. Under rule 25, his acceptance of a position with another banking institution after retirement without the permission of the Northern Trust Co. would have resulted in the forfeiture of his pension. By rule 26 it was further provided that his pension would cease upon bankruptcy, voluntary assignment, conviction of a felony, or upon any judgment or decree for the payment of money being made against him. The trustees were empowered at any time to change the rules and regulations or to substitute entirely new rules; to increase or reduce the rates of contributions by the bank or the officers and employees; and to reduce or increase the pension allowances, provided only that no such change would be made which would deprive any contributor of the right to have his contributions returned to him. The pension trust could be terminated at any time by the bank and, although rule 29 provided that upon termination provision should be made for the continuance of all pensions then being paid to pensioners, there was no assurance that decedent's pension rights could have been enforced to their fullest extent against the pension trust unless there existed sufficient funds in the trust upon its cessation to discharge all of its obligations.

Nor did the pension rights granted the wife by virtue of rule 17 stand in any stronger position than those of her husband, for it is clear that whatever rights she possessed were subject to the same contingencies as those of the decedent, and the rules and regulations were equally applicable to employees and their wives. Any pension granted to the wife would cease upon remarriage. In our judgment, the pension rights acquired by decedent and his widow under the pension trust were in no material respect comparable to those acquired by the beneficiaries under the annuity contracts involved in the cases cited above and relied upon by respondent. On the contrary, it is our considered opinion that decedent's pension rights and those of his wife under the pension trust never acquired the character of fixed and enforceable property rights which were susceptible to transfer by him within the meaning of section 811 (c). Cf. Estate of Emil A. Stake, 11 T. C. 817.

Moreover, we find no act on the part of the decedent which we think can properly be characterized as a "transfer" of an interest in property. Unlike the purchase of the annuity contracts in the Wilder, Clise, and Mearkle cases, the decedent's participation in the pension plan inaugurated by his employer was not voluntary. The plan itself nominated the surviving beneficiaries, limiting them to the wife or the minor children of the officer or employee. Decedent, other than by continuing in his employment at the bank, which incidentally he had enjoyed for 13 years prior to the establishment of the plan, had no part in the selection of his wife as a surviving pensioner. Nor did he personally possess any means of defeating her pension rights other than by resigning his position at the bank. Such considerations serve to emphasize the striking dissimilarity between the instant case and the Nevin and Higgs cases, supra.

It is true that the decedent regularly contributed to the pension fund and the pension trust over a period of approximately 30 years, but the fact that rule 5 (a) required unmarried officers and employees to contribute at the same rate and for the same period of time as married officers and employees apparently refutes any inference that the pension which was ultimately paid to the widow stemmed directly from the contributions decedent had made under the plan. The fact that the pension which was paid to decedent's widow was separate and distinct from that of the decedent is further evidenced by the election afforded the decedent under rule 24, which permitted him to take a pension in a lesser amount upon retirement in consideration of an additional amount to be paid to his wife in the event she survived him. This election has been construed by the bank as providing a pension to the widow or children of the pensioner in addition to the pension otherwise payable to those persons under rule 17. Unlike the decedent in Estate of William J. Higgs, supra, the decedent herein never exercised this option.

The language of our opinion in Estate of Emil A. Stake, 11 T. C. 817, 825, is equally expressive of the conclusions we have reached in the instant case, wherein it states:

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.

In our opinion, the respondent erred in increasing the value of the decedent's gross estate by the amount of $ 25,854.50 representing the commuted value of the pension received by the decedent's widow on the ground that the pension rights of the widow resulted from an inter vivos transfer from decedent to his wife to take effect at his death within the meaning of section 811 (c) of the Internal Revenue Code.

Decision will be entered under Rule 50.