Comm'r of Internal Revenue (In re Estate of Rieben)

Tax Court of the United States.Sep 18, 1959
32 T.C. 1205 (U.S.T.C. 1959)
32 T.C. 1205T.C.

Docket No. 68635.



Donald Steinberg, Esq., and Joseph Steinberg, Esq., for the petitioner. Colin C. MacDonald, Jr., Esq., for the respondent.

Donald Steinberg, Esq., and Joseph Steinberg, Esq., for the petitioner. Colin C. MacDonald, Jr., Esq., for the respondent.

CAPITAL GAIN OR ORDINARY INCOME— PENSION TRUST— DISTRIBUTION ON TERMINATION— SEPARATION FROM SERVICE— SEC. 165(b).— A pension trust of a corporation released to the decedent an annuity policy and later in his same taxable year the decedent received the cash proceeds thereof. The evidence fails to show that either the cash or the annuity contract was received by the decedent as a distribution from the pension trust on account of his separation from the service of the corporation to entitle the petitioner to capital gains treatment under section 165(b).

The Commissioner determined a deficiency of $9,218.91 in income tax of the decedent for 1952. The only issue for decision is whether the Commissioner erred in taxing the cash proceeds from an insurance contract as ordinary income instead of as long-term capital gain.


Edward I. Rieben filed his return for 1952 with the director of internal revenue for the Upper Manhattan district of New York. Edward died on December 3, 1957.

Lee Knitwear Corp., hereafter called Knitwear, was organized in 1935. Its business consisted of the sale of swimwear and in contracting for the manufacture by others of that swimwear. Its stock was owned as follows:

+-----------------------------+ ¦ ¦Per cent ¦ +------------------+----------¦ ¦David Aranow ¦50 ¦ +------------------+----------¦ ¦Theodore Lacob ¦16 2/3 ¦ +------------------+----------¦ ¦Maurice I. Kamlet ¦16 2/3 ¦ +------------------+----------¦ ¦Edward I. Rieben ¦16 2/3 ¦ +-----------------------------+

Edward was president, a director, and salesman for the Metropolitan New York area and Philadelphia, of the company.

Knitwear instituted an employees' pension fund in 1943, which was approved by the Internal Revenue Service in 1944 as within section 165(a) of the 1939 Code. Edward was an eligible participant in the plan from its inception. Lacob, who was a salesman for the New England area, was also a participant in the plan.

The original agreement between Knitwear and the three pension trustees recites a desire of Knitwear to reward employees through investment of the pension trust funds ‘in retirement insurance and/or annuity contracts on the lives of or for the benefit of the participants.’ Knitwear furnished all of the necessary funds to purchase and maintain the insurance contracts. The agreement provided, inter alia, that the ‘Pension Trustees shall deliver the contract to the employee upon termination of services together with an assignment of all right, title and interest therein to him.’ It also provided that the pension trustees should determine what disposition should be made of the contracts in case the corporation withdrew from the plan. The agreement provided, ‘For the purposes hereof, the officers of the corporation shall be deemed to be employees.’

The business of Knitwear was seasonal, the busiest season being from April to June. A decision was reached at some undisclosed time during the 1952 busy season to discontinue the swimwear business of Knitwear because of trouble which the contractors were having with unions and for other reasons.

The trustees decided at some time in September 1952 to terminate the pension trust. One of the pension trustees wrote a letter dated September 10, 1952, stating the Knitwear was dissolving its business and consequently giving up its pension plan. He requested forms be sent the pension committee so that it could release its interest in the various policies.

The board of directors of Knitwear adopted a resolution on October 2, 1952, to dissolve the pension trust. The district director for the Upper Manhattan district on May 10, 1954, approved the liquidation of the pension trust as of September 30, 1952.

Annual premiums on the insurance taken out under the plan were payable in advance on October 1 of each year covering the period from that October 1 to September 30 of the following year. The last annual premium made was on October 26, 1951, and was for the year ending September 30, 1952.

An annuity policy was released to Edward by the pension trustees on September 25, 1952, and he received the cash proceeds thereof in the amount of $25,170.75 on November 10, 1952. He received no other distribution from the pension trust.

Knitwear has never been dissolved or liquidated. Edward continued to be a stockholder, the president, and a director of Knitwear until the time of his death. The only operations of Knitwear after September 1952 consisted of investment activities. Knitwear was not dissolved because its stockholders wanted to utilize its funds for investment purposes and to avoid the payment of tax on its dissolution.

The balance sheet of Knitwear as of October 31, 1951, shows assets of almost $1,000,000. These included no land and only $20,542.16 of depreciable assets less the reserve for depreciation. Capital stock, surplus, and undivided profits of $536,327.37 appear on that balance sheet . The balance sheet for November 1, 1952, shows total assets of over $750,000, less than $2,000 of depreciable assets less depreciation, and capital stock, surplus, and undivided profits of $652,745.68.

Each of the four stockholders of Knitwear owned stock of Teenage Beachwear, a New York corporation. The stockholders of Knitwear decided in 1952 to invest about $150,000 of Knitwear funds in Teen-Age Beachwear and continue the business of that corporation with only one contractor supplying the manufactured goods. Aranow, Lacob, and Edward acted as salesmen for Teen-Age.

Edward reported the $25,170.75 on his income tax return for 1952 as a long-term capital gain, only one-half of which was taxable. The Commissioner, in determining the deficiency, included the entire amount in income and explained as follows:

It is held that the cash proceeds received by you on your surrender of a certain insurance contract, which had been distributed to you in liquidation of the Employees' Pension Trust of Lee Knitwear Corp., constituted ordinary income and not long-term capital gain as reported by you on your return. * * *

The stipulation of facts, including exhibits made a part thereof, is incorporated herein by this reference.



Section 165(b) of the Internal Revenue Code of 1939 provides that amounts actually distributed or made available to any distributee by any pension trust shall be taxable to him in the year in which distributed or made available, under section 22(b)(2) as if it were an annuity, 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 1 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.’

The petitioner contends that the amount received by Edward is taxable as long-term capital gain because it was all paid to Edward at one time on account of his separation from the service of Knitwear, i.e., he ceased to be a salesman after the 1952 season. Actually, no money was distributed to Edward from the pension trust. The stipulation is that an annuity policy was released to him by the trustees of the pension trust and he received the cash proceeds of that policy on November 10, 1952. The policy was released to him on September 25, 1952. The Commissioner's Regulations 111, section 29.165-6, state that if the total distribution is paid the employee in 1 year ‘in which he retires or severs his connection with his employer’ the amount shall be taxed as long-term capital gain. Revenue Ruling 56-214, 1956-1 C.B. 196, states that such separation must be a complete termination of the employment relationship. The Commissioner has taken the position here that the amount in question was not paid to Edward because of the severance of his connection with his employer but was paid to him because of the discontinuation of the pension plan. The petitioner does not contend that the amount would be taxable other than as ordinary income if the distribution was made because of the discontinuance of the pension plan instead of because of Edward's separation from the service of Knitwear. Decision in this case, therefore, seems to turn upon the narrow question of whether the distribution of the contract to Edward was on account of Edward's separation from Knitwear or whether it was on account of dissolution of the pension plan. That question must be decided on dissolution of the pension plan. That question must be decided on the facts in the record. The two possibilities are rather closely related. Cf. Mary Miller, 22 T.C. 293, affd. 226 F.2d 618.

The evidence shows that Edward never severed his connection with Knitwear until the date of his death. The pension plan expressly provided that an officer would be recognized as an employee for the purpose of the pension plan. Edward continued to be an officer of Knitwear until he died. The return of Knitwear for its fiscal year ended October 31, 1953, shows the payment of $750 salary to Edward as president and $750 to Lacob as treasurer. The total of $1,500 was deducted as ‘Compensation of officers.’ Edward on his return for the calendar year 1952 shows as compensation received from Knitwear $12,315.85, but no breakdown thereof.

The determination of the Commissioner is presumed to be correct. The record fails to show that either the cash or the annuity contract was received by Edward as a distribution from the pension plan or trust on account of his separation from the service of Knitwear. Consequently, decision on this point must be for the Commissioner. Harry K. Oliphint, 24 T.C. 744, affd. 234 F.2d 699; Estate of Frank B. Fry, 19 T.C. 461, affd. 205 F.2d 517. Cf. Edward Joseph Glinske, Jr., 17 T.C. 562; Mary Miller, supra.

Decision will be entered under Rule 50.