DocketNumber: Docket No. 5598-75
Citation Numbers: 67 T.C. 878, 1977 U.S. Tax Ct. LEXIS 149
Judges: Raum
Filed Date: 2/28/1977
Status: Precedential
Modified Date: 1/13/2023
1977 U.S. Tax Ct. LEXIS 149">*149
T was an officer of a corporation and a participant in its qualified contributory pension plan. The pension trust was terminated effective in February 1971, and T was discharged by the corporation in April 1971. T received a distribution of a life insurance policy from the trust in October 1971. Because of the actions of one trustee, the cash assets of the trust were blocked in a bank account between June 1971 and January 1972. T received a distribution of cash, representing his entire remaining interest in the trust, in February 1972.
67 T.C. 878">*878 OPINION
The Commissioner determined the following deficiencies in petitioners' Federal income taxes:
1971 | $ 1,102 |
1972 | 3,140 |
The sole issue is whether certain distributions received by petitioner Lee L. Blyler from the Howe & French Pension Trust are entitled to capital gains treatment under
1977 U.S. Tax Ct. LEXIS 149">*152 Petitioners Lee L. Blyler and Evelyn G. Blyler, husband and wife, resided in Sharon, Mass., at the time the petition herein was filed. They filed their joint Federal income tax returns for the calendar years 1971 and 1972 with the Director, Internal Revenue Service Center, Andover, Mass. Since Evelyn G. Blyler is a party herein solely by virtue of having filed joint returns with her husband, Lee L. Blyler will hereafter be referred to as the petitioner.
Petitioner was president of Howe & French, Inc. (the company), which, on September 30, 1964, established a pension trust for its employees. By letter dated April 21, 1965, the Internal Revenue Service ruled that the trust was exempt from tax under
This AGREEMENT, called Howe & French Pension1977 U.S. Tax Ct. LEXIS 149">*153 Trust and hereinafter referred to as the "Trust", by and between Howe & French, Inc., a Massachusetts corporation, hereinafter referred to as the "Employer" and Lee L. Blyler, Herbert W. Snow and David J. O'Connell, as Trustees and their successors, hereinafter referred to as the "Trustees",
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ARTICLE VII TERMINATION OF EMPLOYMENT
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7.04 Participant's Rights on Termination of Employment. Upon the termination of a Participant's employment, the rights of the Participant in the values standing to his account under the Trust shall be disposed of as follows:
67 T.C. 878">*880 (a) Upon the termination of a Participant's employment, after having been a participant in the plan for a period of at least ten (10) years, the Participant shall have a vested equity in the value of the policy on his life.
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(c) In addition to the above values referred to in (a) above, a participant shall be entitled to a vested equity in the Separate Investment Fund, based on his years of participation in the Plan, as follows:
Number of Years of Participation Vested Equity | |
Less than 10 years | 0% |
10 years but less than 11 years | 10% |
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19 years and over | 100% |
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7.07 Termination Prior 1977 U.S. Tax Ct. LEXIS 149">*154 to Expiration of Ten Years' Participation in Plan. If a Participant's employment is terminated prior to the expiration of ten years' participation in the plan, he shall forfeit any and all interest under this trust.
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ARTICLE
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10.02 Termination of Trust. After this Trust shall have been approved by the Internal Revenue Service, as provided in Section 1.02, the Trustees or the Employer shall have the power to terminate it in its entirety. * * * If the Trust shall be so terminated, the rights of each Participant to the benefits accrued to the date of such termination, to the extent then funded for him, shall be non-forfeitable and, subject to the provisions of Article XIII, each Participant or the Beneficiary of a deceased Participant shall be vested in the values being held to fund his benefits including a share of any unallocated Trust assets, which share shall be determined in accordance with Section 10.04, and his share of the Trust assets shall be distributed to him subject to the provisions of Article XIII.
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10.04 Distribution of Trust Assets. In the event that a distribution is to be made in connection with a complete or partial1977 U.S. Tax Ct. LEXIS 149">*155 termination of Trust, the Trustees shall distribute to each affected Participant or his Beneficiaries any Policy, or the values thereof, held for his benefit. In addition, they shall marshal the assets of the Trust, shall apportion unallocated funds as hereinafter provided and, subject to the provisions of Article XIII, shall make distribution to the several Participants as their interests may appear.
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ARTICLE XI THE TRUSTEES
11.01 Number of Trustees. There shall be three Trustees who shall hold the funds and assets received by them subject to the terms of this Trust and upon the uses and trusts and for the purposes herein set forth. The Trustees 67 T.C. 878">*881 shall be responsible only for such funds and assets as shall actually be received by them as Trustees hereunder.
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11.03 A Majority of Trustees to Act: Any One to Sign Papers Required by Insurer. Acts and decisions of the Trustees shall be by a majority of the Trustees either in a meeting or without a meeting but in writing signed by a majority. Any one of the Trustees may sign on behalf of all, applications for Policies or any papers which may be required by the Insurer.
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11.06 Trustee's Individual Liability. 1977 U.S. Tax Ct. LEXIS 149">*156 Except for gross negligence, willful misconduct or willful breach of this Trust, no Trustee shall incur any individual liability for his act or failure to act pursuant to this Trust. Each Trustee shall be protected in acting upon any document believed by him to be genuine and to have been executed or delivered by the party purporting to have executed or delivered the same. No Trustee shall be liable for the act of any other Trustee. The Trustees may engage agents to assist them in their duties and may consult counsel who may be of counsel to the Employer. The Trustees shall be relieved of all responsibility for anything done or not done in good faith on advice of counsel.
11.07 Construction of Trust and Indemnification of Trustees. In the event of any ambiguity, the Trustees shall have power to construe this Trust and their construction of the same, made reasonably and in good faith, shall be final and conclusive. The Trustees may postpone performance until adjudication of their action in a court of competent jurisdiction or until they shall have been indemnified to their satisfaction.
On or about April 20, 1970, Howe & French, Inc., was acquired by Landsverk Corp., apparently1977 U.S. Tax Ct. LEXIS 149">*157 by means of a stock purchase agreement. Shortly thereafter, employees of Howe & French, Inc., began to be dismissed from their positions, and in early 1971 petitioner became aware of the possible termination of his position as president. He was in fact discharged on or about April 1, 1971, and since that time he has not been employed by either Howe & French, Inc., or Landsverk Corp. or any of its subsidiaries or affiliates.
In January 1971 petitioner learned that the pension trust was to be terminated due to the decline in profits of Howe & French, Inc., and Landsverk. Upon application (apparently signed by David J. O'Connell as trustee) to the District Director in Boston, approval for such termination was received with an effective date of February 15, 1971.
On June 7, 1971, petitioner and Herbert Snow were removed as trustees of the trust. At that time, the assets of the trust consisted of life insurance policies on the trust participants' lives, and cash assets held in a trust bank account with respect to which Herbert Snow was the only 67 T.C. 878">*882 authorized signatory. Snow, upon being relieved of his duties as trustee, refused, on or about June 21, 1971, to release the funds1977 U.S. Tax Ct. LEXIS 149">*158 contained in the trust bank account. It was Snow's demand that he first be allowed a $ 1,000 trustee's compensation fee and $ 325 for personal attorney's fees. Although negotiations between counsel for the trust and counsel for Snow began in July or August of 1971, the dispute was not resolved, nor did Snow release the funds in the bank account, during 1971.
As of October 8, 1971, the balance in the pension trust (both insurance policies and the bank account) allocable to petitioner was $ 23,238. On October 8, 1971, Boit, Dalton & Church, Inc., insurance agents for the trust, distributed to each trust participant his respective life insurance policy or policies. 2 Petitioner elected to surrender his policy for its cash value of $ 5,171, which amount he received in November 1971. Petitioners reported this amount on their 1971 joint Federal income tax return as a long-term capital gain.
1977 U.S. Tax Ct. LEXIS 149">*159 In January 1972 Snow relinquished his demands for trustee's fees and personal attorney's fees and released, to the new trustees, the funds in the trust bank account. The new trustees thereafter, on February 9, 1972, distributed to petitioner $ 18,067, which represented the balance standing in his account in the trust after distribution of the life insurance policy on October 8, 1971. Petitioners deducted from the sum received Lee Blyler's contributions to the trust of $ 3,568, and reported the remainder, $ 14,499, as long-term capital gain on their 1972 joint Federal income tax return.
The Commissioner determined that the distributions to petitioner by the trust in 1971 and 1972 did not qualify for capital gains treatment. 3
1977 U.S. Tax Ct. LEXIS 149">*160 67 T.C. 878">*883 The taxation of distributions by qualified pension trusts to participants and beneficiaries of such trusts is governed by
(1) The total amount "payable with respect to any employee" must be paid to the taxpayer-distributee "within 1 taxable year of the distributee"; and
(2) The distribution must be made "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."
Although respondent asserted at the hearing when the case was submitted that the distributions at issue herein failed to qualify under the second requirement because they were not made "on account of" petitioner's death or separation from service, neither party has directly argued the point. 6 Rather, 67 T.C. 878">*884 the issue presented1977 U.S. Tax Ct. LEXIS 149">*161 relates to the first requirement, namely, did petitioner receive the total distributions payable to him by the trust within a single taxable year?
1977 U.S. Tax Ct. LEXIS 149">*163 The parties agree that petitioner actually received one distribution (the life insurance policy converted by petitioner into cash) in 1971, and a second distribution (cash) in 1972. The Government argues that this disposes of the issue, since the clear requirements of
1. In
The theory of constructive receipt is one of long standing, and regulations embodying that concept have had judicial approval as far back as
Moreover, it is well established that the doctrine of constructive receipt applies to distributions from qualified pension plans,
1977 U.S. Tax Ct. LEXIS 149">*166 Petitioner relies primarily upon the decision of the Fifth Circuit in
Although Humble undoubtedly placed an obstacle in the trustee's path to receiving the funds by placing them in a suspense account, the obstacle was
Apparently, the court felt that since there was no basis whatever for failing to pay over the royalties to the trustee, a mere demand therefor by the trustee would have resulted in immediate payment in the circumstances. 8 We do not pause to consider whether we would have arrived at the same result on the facts as that reached by the District Court which was accepted by the Fifth Circuit, for the present case is clearly distinguishable. Unlike Humble, Snow was affirmatively refusing to release the funds on deposit while asserting an adverse claim, and, on the sparse record before us, we cannot say that his position was frivolous. True, the trust instrument did not provide for trustees' fees, nor was Snow's right to his claimed attorney's fees spelled out therein. Nevertheless, no Massachusetts cases or statutory provisions have1977 U.S. Tax Ct. LEXIS 149">*168 been called to our attention that would render a claim to such fees wholly without merit, and indeed there are indications that the point was at least arguable. 9
1977 U.S. Tax Ct. LEXIS 149">*169 67 T.C. 878">*887 Contrary to petitioner's contention, we cannot find on this record that Snow's conditional refusal to release the funds in the bank account was wholly unjustified. We have dealt with this point because the Fifth Circuit relied upon it in
2. Petitioner makes an alternative contention that even if he is not entitled to capital gains treatment in respect of the 1972 payment of cash, he may nevertheless have the benefit of such treatment to the limited extent of the 1971 distribution relating to his life1977 U.S. Tax Ct. LEXIS 149">*170 insurance policy. He argues that the term "total distributions payable" in
67 T.C. 878">*888 Petitioner does not refer us to any legislative history or decided cases in support of his contention. He relies solely upon two rulings of the Commissioner which have attempted to relax the rigors of the statute in several1977 U.S. Tax Ct. LEXIS 149">*171 specified situations.
In
By analogy, petitioner reasons that funds in the trust bank account were not "payable" in 1971 because of Snow's intransigence, and argues that the 1971 distribution (the life insurance policy) therefore constituted the balance standing to petitioner's account and payable to him at the time of the distribution. We disagree.
1. All references herein to the Internal Revenue Code are to the Code as in effect for the calendar years 1971 and 1972. For taxable years beginning after Dec. 31, 1973, substantial changes were made in the Code affecting the taxation of distributions made after that date. See sec. 2005 of the Employee Retirement Income Security Act of 1974, Pub.L. 93-406, amending Code
2. The stipulated facts state that the premiums on the policies were due prior to Oct. 30, 1971. If the premiums were not paid by that date, the policies would automatically lapse and be placed on a paid-up basis at a reduced amount of insurance.↩
3. The Commissioner did not object to the manner in which petitioner recaptured his contributions to the trust, i.e., by deducting them from the cash distribution received in 1972. Cf.
4.
(a) Taxability of Beneficiary of Exempt Trust. --
(1) General Rule. -- Except as provided in paragraphs (2) and (4), the amount actually distributed or made available to any distributee by any employees' trust described in
(2) Capital gains treatment for certain distributions. -- In the case of an employees' trust described in
5.
6. We note that the trust was terminated 6 weeks prior to petitioner's discharge by the company, and also that petitioner was not entitled to any distributions from the trust merely because of his discharge, for the simple reason that he had not been a trust participant for the required minimum of 10 years at the time of his discharge in accordance with the provisions of sec. 7.04 and sec. 7.07 of the amended trust agreement,
7. The record does not show the circumstances under which Snow "refused to release" the funds in the trust bank account. Petitioner has offered no evidence that the trustees officially directed Snow to release the funds or that the trustees directed Snow or anyone else to pay over the funds to participants and/or beneficiaries of the trust.↩
8. The District Court's decision in
9. Under Massachusetts law, trustees are normally entitled to compensation for services rendered to the trust. In the case of testamentary trusts, this right is established by statute,
Ross v. Commissioner of Internal Revenue , 169 F.2d 483 ( 1948 )
Commissioner of Internal Revenue v. Davis , 132 F.2d 644 ( 1943 )
E. N. Funkhouser and Estate of Nellie S. Funkhouser, ... , 375 F.2d 1 ( 1967 )
United States v. Hancock Bank, Trustee of the Estate of ... , 400 F.2d 975 ( 1968 )
Loose v. United States , 74 F.2d 147 ( 1934 )
william-b-leavens-jr-and-emeline-p-leavens-in-no-71-1675-v , 467 F.2d 809 ( 1972 )
Corliss v. Bowers , 50 S. Ct. 336 ( 1930 )