Docket No. 1559-67.
Joseph M. Sperzel, pro se. Jay S. Hamelburg, for the respondent.
Joseph M. Sperzel, pro se. Jay S. Hamelburg, for the respondent.
1. Held, amendment to a pension plan did not result in any deductible ‘theft’ loss to a participating employee. Sec. 165, I.R.C. 1954.
2. Held, amount of employee's vested interest in pension plan which became immediately available to him upon termination of employment was taxable to him as long-term capital gain, sec. 402(a), notwithstanding that he refused to accept such amount in the circumstances of this case.
Respondent determined a deficiency in petitioners' income tax for the year 1964 in the amount of $3,056. Two issues are presented: (1) Whether petitioners sustained a theft loss, deductible under section 165, I.R.C. 1954, due to a change adopted in a retirement pension plan of a corporation of which petitioner Joseph M. Sperzel was an employee, and (2) whether petitioners must report as long-term capital gain the cash surrender values of certain insurance policies which vested in petitioner Joseph M. Sperzel upon termination of his employment in 1964.
FINDINGS OF FACT
Some of the facts are stipulated and are incorporated herein by reference.
The petitioners Joseph M. Sperzel (hereinafter referred to as petitioner) and Helen J. Sperzel are husband and wife, and at the time of the filing of the petition herein, they resided in East Northport, Long Island, N.Y. They filed a joint Federal income tax return for the taxable year 1964 with the district director of internal revenue, Brooklyn, N.Y.
Petitioner was employed by Buensod-Stacey, Inc. (which merged with Aeronco Manufacturing Corp. in March 1960, and changed its name to Buensod-Stacey Corp., and which will hereafter be referred to as Buensod), as an engineer commencing September 1939. He became chief engineer in 1955 and held this position until his resignation from Buensod effective February 28, 1964. He was 55 years old at the time of his resignation.
By an agreement dated March 15, 1944, Buensod instituted a retirement pension plan (sometimes hereinafter referred to as the plan) for its employees. Petitioner was one of the employees eligible to participate in the plan and he did so participate.
Pursuant to the provisions of the plan, Buensod paid premiums to a trustee (Chase Manhattan Bank, formerly known as Chase National Bank of the City of New York), which purchased individual retirement policies from the Phoenix Mutual Life Insurance Co. (hereinafter referred to as Phoenix) for the benefit of each participating employee. Title to all such retirement contracts was in the trustee.
The plan established a Pension Trust Committee of three members, one to be designated by Buensod, one to be designated by the participating employees in the plan, and the third to be appointed by the two members designated as above. Actions taken by the committee were to be final and binding on all participating employees.
Buensod had the right to modify, alter, or amend the plan, with the consent of the committee, provided that the accrued benefits of a participating employee were not thereby diminished.
The premium costs under the plan were borne entirely by Buensod except where individuals represented a higher risk than the group insured. Petitioner did not fall within any such higher risk category. The policies purchased by the trustee for the employees embodied both a life insurance feature and provisions for monthly retirement income for the employee beginning at age 65. That portion of the premium representing the term life insurance coverage was treated as additional income to the employee, and was reported by Buensod to the Internal Revenue Service on Forms 1099. During the years 1945 and 1947 through 1963 amounts aggregating some $872 were thus reported by Buensod in respect of petitioner's policies, and petitioner included such amounts in his taxable income for those years. The portions of the premiums allocable to the retirement rights were not treated as income to petitioner.
Article VII, paragraph 4, of the trust agreement provided:
4. If during the continuance of this plan the Trustee is not provided with sufficient funds to pay the annual premium on any contract held by the Trustee, the Committee may, before the expiration of the grace period provided in the contract, determine what action should be taken. For this purpose, the Committee may direct the Trustee to borrow from the insurance company or companies issuing the contract such funds to pay said premium or to exercise such of the rights or options provided in the contract as the Committee shall determine should be exercised. If the funds at the disposal of the Trustee available for the payment of such premium, together with the loan value of the contract, are insufficient to pay such premium, or if the Committee does not deem it advisable for the best interests of the participating employee involved to borrow against the contract or to exercise the options granted in the contract, it shall, within a reasonable time, prior to the expiration of the grace period provided in the contract, notify the participating employee that the premium will not be paid or the options exercised, and that the participating employee may pay the premium by depositing cash equivalent to the premium with the Committee for transmission to the Trustee. If a participating employee thereafter notifies the Committee that he cannot or will not pay the premium, or fails to notify the Committee within ten (10) days from the sending of such notice by the Committee, then the Committee shall take any action it shall deem best with respect to said contract, and may permit said contract to lapse. To the extent that the reserve values in the contracts held by the Trustee permit, the treatment of all participating employees shall be equal and in proportion to such values and in no event shall be employee who is a shareholder of the corporation or an officer, highly paid or supervisory employee receive treatment discriminating in his favor.
Upon termination of employment the plan provided as follows:
TERMINATION OF SERVICES
1. In the event that any participating employees leaves the employ of the corporation voluntarily or is discharged for cause prior to the age of retirement, and on the date of termination of such employment has not completed at least five (5) years of service since the date of his entrance into the Plan, such participating employee shall be deemed to have released without further instrument being required to effectuate such purpose, all further rights and benefits under the plan and the Committee shall direct the Trustee to surrender the contract or contracts on such participating employee's life to the issuing company or companies and receive such surrender values as such contract or contracts may provide.
3. In all (other) cases, the Trustee shall deliver the contract to the employee upon termination of services together with an assignment of all right, title and interest therein to him.
Pursuant to the plan, six certificates of participation relative to insurance contracts were issued by Phoenix in favor of petitioner between September 1944 and May 1962. These contracts provided petitioner or his named beneficiaries with a combined monthly retirement income of $142 for life, 120 months certain, commencing at age 65, and a death benefit of $17,500 should he die before age 65.
In 1963, the plan was amended by Buensod, with the approval of the committee. The amendment was first made known to the participating employees by a letter dated January 29, 1964, in which it was stated that certain changes in the benefits provided for under the plan went into effect retroactively to June 20, 1963. In substance, the amended plan provided for increased payments upon retirement, while death benefits prior to the retirement were eliminated except to the extent of a participant's vested right in the old plan as of June 20, 1963. A participant's vested right was the cash value of his interest in the insurance policies taken out on his behalf.
A summary of the new plan explained that vested rights acquired under the old plan were to be protected as follows:
PROTECTION FOR PARTICIPANTS HAVING VESTED RIGHTS
Those participants under the old plan who had acquired vested rights, prior to June 20, 1963, will have those rights protected.
(a) If they terminate their employment at any time, they will receive that sum of money they would have received if they had terminated employment prior to June 20, 1963.
(b) If they should die prior to retirement, their beneficiary will receive the amount payable under (a), plus interest at the rate of 3% compounded annually from June 20, 1963 to the date of death.
(c) At retirement, a participant may elect to receive either the pension available under the new plan, or the cash available under (a), or whatever pension such cash will purchase.
Petitioner's vested interest as of that date amounted to $6,426.26.
On December 20, 1963, the trustee of the plan surrendered the policies purchased under the old plan to Phoenix.
Petitioner was extremely upset by Buensod's announcement that the plan had been amended retroactively. He felt that he was being deprived of insurance protection under the new plan because he no longer was to be provided with the death benefit feature of the old plan. He was also distributed by the fact that the original Phoenix policies were surrendered prior to the time that he was notified of the amendments because he felt deprived of the opportunity to personally acquire the old policies as a result of the surrender.
On February 25, 1964, petitioner submitted his resignation to Buensod, noting as his reasons therefore his dissatisfaction with certain intracompany changes and his unhappiness with the amended retirement plan. He also made the following demand of the company:
Will you therefore please advise the Trustee of this stated termination date of my employment with Buensod-Stacey Corporation, requesting delivery to me, as originally provided in the ‘Old’ Plan, the Phoenix Mutual Retirement Income Life Insurance Contracts numbered 896,640, 1,037,696, 1,222,612, 1,290,839, 1,348,620 and 1,403,110 issued for my benefit and held in trust for me by the Trustee as evidenced by their certificates dated September 8, 1944, May 10, 1950, May 11, 1956, April 23, 1958, June 6, 1960 and May 16, 1962 respectively, together with an assignment of all right, title and interest therein, without restraint or prejudice to the exercise of my rights under the original terms of the policies.
Since the policies demanded had been surrendered on December 20, 1963, they could not be delivered to petitioner. Phoenix thereupon informed petitioner of his alternatives under the plan by letter dated March 16, 1964. It stated:
MARCH 16, 1964
MR. JOSEPH M. SPERZEL
9 Forest Drive.
East Northport, N.Y.
I was sorry to hear from Bob that you have terminated your service with the Buensod-Stacey Corporation.
As you will recall, under the terms of the Amended Pension Plan your vested interest amounts to $6,426.26.
For your guidance and information any one of the following options are now available to you:
(1) You may withdraw this sum in cash.
(2) You may receive an annuity for life commencing at the present time.
(3) You may leave the monies on deposit with the Phoenix Mutual Life Insurance Company at interest.
This money together with the interest may be withdrawn at any time or applied to the purchase of an annuity on any anniversary date prior to age 70.
We would be happy to review these various options with you personally, at which time we can then help you work out the plan you feel will fit in best with your program.
I wish to extend to you my best wishes for your continued success in the future.
(S) John JOHN H. KULL
cc: Mr. Robert O. McGary
Petitioner, however, still believed that he was being deprived of his rights and he refused to accept any of the alternatives offered. He thereupon wrote to the Insurance Department of the State of New York and sought assistance. Petitioner received the following reply under date of March 24. 1964:
MARCH 24, 1964
MR. JOSEPH SPERZEL
9 Forest Drive
East Northport, New York
This is in reference to your complaint concerning policies issued by the Phoenix Mutual Life Insurance Company.
May we state at the outset that the only question which it is within the purview of this Department to determine, is whether or not the Phoenix Mutual violated any provisions of the Insurance Law in its administration of these policies. This Department, as you know, has no jurisdiction over Buensod-Stacey Corporation or the Chase Manhattan Bank.
In considering this matter we examined a sample of the policies issued in your name. We find that the contract names as owner of the policy the Chase Manhattan Bank, as Trustee under the provisions of the Buensod-stacey Corporation Employees Pension Plan. The Trustee, it appears, acted upon the direction of the Pension Trust Committee and surrendered the policies to the Phoenix Mutual on December 20, 1963. One of the rights of the Owner, as provided in the contract, is to surrender the policy. We also note that one of the provisions of the Agreement made by and between Buensod-stacey, Inc. and the Chase National Bank, reads as follows:
‘The title to all contracts shall be in the Trustee, and the Trustee shall have the exclusive right to exercise any and all privileges, options, and rights thereunder, except as hereinbefore to the contrary expressly provided.’
It would appear to us that if the Committee acted improperly, your recourse would lie in an action against the Committee or the Corporation.
Under the circumstances, we regret our inability to be of service to you in this matter.
Very Truly yours,
HENRY ROOT STERN, JR., Superintendent of Insurance By (S) Adeline Del Sonno ADELINE DEL SONNO, Examiner
After discussions with Buensod and Phoenix it was apparently agreed that Phoenix would reinstate the policies in question upon his payment of the required premiums from June 20, 1963. This offer was made to petitioner in a letter from Phoenix dated July 16, 1964:
JULY 16, 1964
MR. JOSEPH M. SPERZEL,
9 Forest Drive
East Northport, N.Y.
Re: Policies No. 896,640; 1,037,696, 1,222,612; 1,290,839, 1,348,620; 1,403,110
In accordance with our telephone conversation today, we are sending to our Home Office the forms that they have requested for their approval, in order to reinstate the six above numbered policies.
As I explained to you, to pay all the premiums up to March 20, 1965, the cost as of July 20, 1964 to restore these policies, would be $8,963.45, against which may be applied the vested interest of $6,426.26, thus leaving a cash payment due of $2,537.19.
As you realize, if the payment is not made as of July 20, 1964, then there would be additional interest required until the payment has been made.
In order that you may have the calculations on each of the policies as of July 20, 1964, we are giving you the following information:
+---+ ¦¦¦¦¦ +---+
Policies Nos. Cost to pay Premiums Total to 6/20/63 with interest 896,640 $2,246.43 $220.57 $2,467.00 1,037,696 1,481.52 202.57 1,684.09 1,222,612 994.09 284.44 1,278.53 1,290,839 793.64 330.09 1,123.73 1,348,620 627.71 452.86 1,080.57 1,403,110 412.08 917.45 1,329.53
Don't forget, you are going to send me your Social Security Number.
Very truly yours,
(S) John H. Kull JOHN H. KULL
Petitioner rejected this offer because he believed that his vested interest should have been calculated up to December 20. 1963, rather than to June 20, 1963.
Other letters were exchanged between petitioner and Phoenix and to the date of the hearing herein (June 3, 1968) petitioner has refused either to reinstate the policies in question under the proposed terms or to withdraw the amount of his vested interest, made available to him as of the time of his termination of employment.
On May 24, 1966, petitioner filed a ‘deposition’ with the attorney general of the State of New York in which he outlined his complaint with respect to his interest in the amended plan. The attorney general's office responded that it lacked jurisdiction to deal with the matter. After a reply from petitioner the attorney general's office notified petitioner that his complaint was being referred to the State department of insurance. In a letter of October 3, 1966, the attorney general ‘s office stated that no action would be taken ‘unless and until the Insurance Department reports valid basis for action.’
Petitioner received a letter dated October 24, 1966, from the insurance department which expressed the same view as its earlier letter of March 24, 1964, supra, to wit, that no action was indicated. The October 24, 1966, letter reads as follows:
OCTOBER 24, 1966
MR. JOSEPH SPERZEL.
9 Forest Drive
East Northport, New York
We have reviewed our own file in the matter of your complaint against the Phoenix Mutual Life Insurance Company as well as the material which was forwarded to us by Attorney General Louis J. Lefkowitz.
We find that there were several policies issued on your life by the Phoenix Mutual Life Insurance Company in accordance with applications made by the Trustee of the Buensod-Stacey Corp. Pension Plan. The contracts named the Trustee as owner. As owner, it had the right under the provisions of the contracts to surrender them. Accordingly, they were terminated on December 20, 1963 and the cash values were transferred to a Group Annuity contract.
Since ownership had not been transferred to you prior to termination, Phoenix Mutual would have had no legal or proper basis for allowing you to exercise any of the privileges, options or rights of the owner.
If you feel that under the Pension Plan you had an inalienable right to be advised of any pending action by the Committee or by your employer to change the benefits or Plan or that you have been aggrieved by your employer and/or the Pension Plan Committee, your remedy would lie in a court action.
You have made certain allegations against persons associated with your former employer. As these persons are not subject to the jurisdiction of this Department, we have no authority over them and, therefore, are not in a position to rule on the propriety of their actions.
It would appear to us that the issues you have raised concern primarily the propriety of acts committed by Buensod-Stacey Corporation and/or the Pension Plan Committee. There issues are properly resolved in a court of law.
We regret that, under the circumstances, we are not in a position to be of service to you.
Very truly yours,
HENRY ROOT STERN, JR., Superintendent of Insurance By (S) Carl Waldinger CARL WALDINGER, Associate Examiner.
Petitioner did not take any legal actions against those he believed responsible for depriving him of his insurance policies. He stated that he thought that the costs of such action would be prohibitive and that the matter could best be handled through criminal prosecutions, though none was initiated.
Petitioner reported a ‘theft loss' in his return for the year 1964 on the basis of the changes in the pension plan discussed above. The amount of the loss was calculated by petitioner to be $10,771, a figure based on the assumption that the death benefit provision of the old plan had a present value of at least this amount.
The Commissioner disallowed this deduction the ground that petitioner failed to prove that a theft loss or any other deductible loss had been sustained.
In addition, the Commissioner determined that petitioner realized a long-term capital gain under section 402(a) with respect to his interest in the pension plan upon his termination of employment because his vested interest in the plan, amounting to $6,426, was then made immediately available to him. Since petitioner was deemed to have contributed an amount of $872 the net gain upon which the deficiency was computed was $5,554. This amount was reduced by 50 percent in accordance with section 1202, I.R.C. 1954, and the amount included in petitioner's income with respect to his interest in the plan was $2,777.
Two issues must be decided: (1) Whether petitioner suffered a deductible ‘theft loss' under section 165 as a result of the amending of the employee pension plan of which he was a beneficiary; and (2) whether petitioner realized a long-term capital gain pursuant to section 402(a) and the regulations thereunder upon his termination of employment because his vested interest in the pension plan became immediately available to him.
1. Section 165 of the Code provides for the deduction of losses arising from theft. But the word ‘theft’ extends only to the ‘criminal appropriation of another's property to the use of the taker.’ Edwards v. Bromberg, 232 F.2d 107, 110 (C.A. 5). Petitioner argues that such a criminal appropriation has taken place under the facts presented here while the Commissioner denies the existence of any loss by theft or otherwise. We agree with the Commissioner.
Whether a loss has occurred by reason of the criminal activities of another depends upon the law of the jurisdiction in which the loss is said to have occurred. Michele Monteleone, 34 T.C. 688. Petitioner's evidence, far from establishing a violation of New York's criminal laws, clearly indicates that the amendment of Buensod's pension plan did not violate any of the criminal laws of New York. We refer specifically to petitioner's lengthy correspondence with the New York State offices of the department of insurance and the attorney general. These authorities flatly declined to prosecute any of the parties accused of wrongdoing by petitioner. Further, the department of insurance informed petitioner that in substance his claim was without merit. Such evidence surely cannot fulfill petitioner's burden of showing that he suffered a loss due to the criminal activities of Buensod, Phoenix, or any other person or persons connected with the company pension plan. At best, petitioner had only a civil cause of action in respect of the wrongs which he claims he suffered.
Moreover, we are not convinced that any wrongdoing occurred here which can be said to have caused the petitioner any loss. The pension plan an issue was subject to amendment under the terms of the pension trust indenture. Such an amendment was duly approved by the Pension Plan Committee. Petitioner's rights were not diminished by this change as his vested interest in the plan as of the time of the amendment was secured. Petitioner had no irrevocable property right of the policies themselves; his interest was only in an amount representing the cash value of his interest in the plan, which was in no way affected by the amendment.
A more significant weakness in petitioner's position is that Phoenix offered to reinstate the very policies which petitioner claimed were wrongfully taken from him, provided, of course, that petitioner paid the premiums due thereon from June 20, 1963, the date the plan was amended. Thus, the policies allegedly stolen from petitioner were in fact made available to him even though they no longer were held by the pension trust. This makes irrelevent petitioner's claim that he was deprived of the opportunity of preventing a lapse of the policies because of the retroactive operation of the amendments to the plan. In fact, petitioner could have taken over the policies during 1964, the year in which petitioner claims he suffered their loss.
Petitioner contends, however, that Phoenix's offer to reinstate the policies was unfair because he could have assumed the policies only by applying the accumulated vested interest as shown on June 20, 1963, to the premiums due on such policies. He argues that his vested interest should have been calculated as of December 20, 1963, rather than June 20, 1963, because Buensod paid premiums to December 20, 1963, and he reported as income a part of those premiums up to that date. There is no basis for this position. Petitioner reported income only on that portion of the premium which was allocated to term life insurance coverage, which coverage he received up until December 20, 1963. Petitioner did not report any income in 1963 with respect to the remaining portion of the premium paid by Buensod. Whether that portion of the premium should have accrued to petitioner was at best a highly debatable matter in light of the modification of the plan as of June 20, 1963.
We also note but need not pass upon the Government's further alternative contention that even if a theft loss is found to have occurred, the amount of the loss must be limited to the adjusted basis of the property stolen. Income Tax Regs., secs. 1.165-7(b)(i) and 1.165-8(c). In the present case the maximum amount invested by petitioner in the policies cannot exceed $872, and indeed it is doubtful that he had any adjusted basis, since the amount thus chargeable to him represented merely the cost of term life insurance which had already been fully exhausted.
2. Section 402(a), I.R.C. 1954, requires the inclusion in income of amounts actually distributed or made available to a distributee of an employee trust where the contributions to that trust were not taxable to the employee at the time they were made. The regulations under this section consider such amounts gains from the sale or exchange of a capital asset held for more than 6 months. Income Tax Regs., sec. 1.402(a)-1(a)(6)(i) and II). From the time of petitioner's termination of employment with Buensod in February 1964, he was immediately entitled to receive $6,426, his vested rights, as of June 20, 1963, in the six insurance policies issued on his behalf. Even though petitioner was on the cash basis, he had unrestricted right to such amount. Since petitioner's vested rights arose as a result of Buensod's contributions, which were not taxable to petitioner at the time they were made, he is properly taxable once that amount was ‘made available’ to him. Sec. 402(a).
This result is not altered simply because petitioner believed the total to be inadequate. It is clear that at least $6,426 was available to him without dispute and that petitioner's belief that a larger sum was due was without foundation. Accordingly, the vested rights of petitioner under the plan were taxable to him as a long-term capital gain in 1964, the year in which the funds became available to him.
Decision will be entered for the respondent.