Docket No. 20638.
Logan Fulrath, Esq., for the petitioner. Pershing W. Burgard, Esq., for the respondent.
After 30 years of foreign service in the employ of the Standard Oil Company of New York and its successor companies, the decedent was entitled to retire on an annuity for the remainder of his life under the provisions of a pension plan inaugurated by the employer. Five years prior to the date of his retirement, the decedent elected, under an option provided in the pension plan, to take a reduced annuity on his retirement and in the event his designated dependent survived him, that dependent would receive an annuity for life.
Held, under section 811(c), I.R.C., as amended by P.L. 378 (1949) the election to take a lesser annuity was not a transfer
(1) under which decedent retained the possession or enjoyment of, or the right to the income from, the property transferred, section 811(c)(1)(B); or
(2) of property in which decedent retained a reversionary interest, section 811(c)(1)(C), as limited by section 811(c)(2). Logan Fulrath, Esq., for the petitioner. Pershing W. Burgard, Esq., for the respondent.
The respondent determined a deficiency of $26,751.63 in the estate tax liability of the Estate of Frederick John Twogood, deceased.
The primary issue is whether or not the decedent made a transfer within the meaning of section 811(c) of the Internal Revenue Code in electing to receive a reduced annuity in order that his wife would also receive an annuity in the event of her survivorship.
In the event that it is decided that a transfer was made as contemplated by the statute, a subordinate issue is the valuation of the interest transferred.
Two minor issues relating to the value of certain shares of stock and deductions from the gross estate for legal services were settled by stipulation.
The stipulation of facts, which is hereby adopted in full, is dispositive of all the questions of fact except the value of the interest alleged to have been transferred. Evidence on this question was adduced by exhibits and oral testimony.
FINDINGS OF FACT.
The decedent was born in Raymertown, New York, in 1889. In May 1912, he went to work for the Standard Oil Company of New York. He worked for that company and its successor companies in the North China territory until he was interned by the Japanese in the early part of World War II. The decedent was later released and returned to the United States. On July 1, 1943, the decedent was retired from the service of his employer and died on April 28, 1944, a resident of the State of New York. Frances F. Twogood is the decedent's widow, the executrix of his estate and as such the petitioner herein.
The decedent was married in 1916 to Theresa E. Twogood, who was born on June 2, 1891. By that marriage he had three children, one of whom, Lucille E. Twogood, has been since birth and still is an incompetent. That marriage was dissolved in 1938 by divorce obtained by the decedent. The decedent was married in 1938 to Frances F. Twogood, his surviving wife at his death.
In 1903 the Standard Oil Co. inaugurated a pension or retirement plan for its employees. This plan, as later amended, was underwritten and administered by the Metropolitan Life Insurance Co. and known as ‘Group Contract No. 103,‘ hereinafter referred to as the Plan. By its terms the decedent was entitled to retire after 30 years of continuous foreign service and thereafter during his life was entitled to receive a retirement annuity, payable monthly. Under this Plan the decedent could request the insurance company, prior to the normal retirement date, to reduce the annuity payable to him by a certain amount and to continue the annuity payments in a further reduced amount to a designated dependent should that dependent survive him. That privilege was exercised by the decedent on October 15, 1937, whereby he elected when and if he should reach the time of retirement, to receive $955.82 each month, instead of $1,073.34. The decedent elected Theresa E. Twogood, then his wife, as his designated beneficiary to whom an annuity would be payable in the amount of $416.67 each month for the remainder of her life if she survived him. (Theresa E. Twogood is herein sometimes referred to as the ‘beneficiary‘ and sometimes as ‘dependent annuitant.‘)
If the decedent had died at any time during the period from October 15, 1937, the date of such election and designation, and June 1, 1942, the date on which he became entitled to retire, no annuity would have been payable to anyone.
According to the Plan, that election and designation made by the decedent on October 15, 1937, could not be rescinded by him thereafter without the consent of the insurance company, and could not be rescinded at all after June 1, 1942. If decedent's wife had predeceased him the election was still binding and decedent would have been entitled, on retirement, only to the reduced amount payable, $955.82 per month.
By the terms of the Plan, the right of the decedent to the retirement annuity and the right of his designated dependent to receive the payments after the decedent's death could not be sold, pledged or transferred by assignment or otherwise. Decedent's total contribution to the annuity Plan over the years was $8,616, which amount only would have been paid to the estate had decedent died previous to the ripening of his annuity.
The amount by which the decedent's retirement annuity was reduced, to provide an annuity for his designated dependent after his death if she should survive him, was computed by Metropolitan Life Insurance Co. on the basis that on June 1, 1942, the date the election became effective, the sum of the actuarial value of the decedent's retirement annuity as reduced, and the actuarial value of the annuity to his designated dependent, should be equal to the actuarial value of the retirement annuity which the decedent would have received if he had not elected to have his annuity reduced.
Under the terms of the separation agreement dated July 18, 1938, incident to the divorce of the decedent and Theresa E. Twogood, his former wife, the decedent agreed never to change the designation made in 1937 of his former wife as the dependent under the Plan. This agreement was made after protracted negotiations in which both the decedent and his wife were represented by their respective counsel, and one of the principal considerations for the promise then made by the decedent never to change the designation made by him was the former wife's undertaking by that agreement to provide for the care, treatment and maintenance of their incompetent child.
On June 1, 1942, the decedent became entitled to retire on the full annuity. On that date, however, the decedent was interned by the Japanese. After his return to this country, he was formally retired on June 1, 1943. In accordance with the terms of the Plan the decedent received $955.82 each month after his retirement. Upon the death of the decedent in 1944, monthly payments of $416.67 were begun to the decedent's former wife, Theresa E. Twogood.
The Federal estate tax return for the estate of the decedent was filed on July 26, 1945, within the time prescribed by law, with the collector of internal revenue for the second district of New York. The total estate tax of $1,053.95 shown thereon to be due was paid by the executrix when the return was filed on July 26, 1945.
The respondent added to the gross estate of the decedent the amount of $107,945.59 which he contends was the value at the decedent's death of the annuity payable to the decedent's former wife. In so doing, the respondent contends that the decedent, in electing to receive a reduced annuity, made a transfer within the meaning of section 811(c) of the Internal Revenue Code.
A survivorship annuity is an annuity payable during the lifetime of a person (sometimes called the annuitant) commencing upon the death of another person (sometimes called the nominator). The annuity which Theresa E. Twogood received was a survivorship annuity. The seller of such an annuity, in computing the cost, must consider the page of the parties and the actuarial possibility of the annuitant surviving the nominator. The cost set by the seller of such a policy is further subject to variance from time to time depending on the ‘going‘ interest rate and the ‘loading factor‘ involved in the formulae used in the computations. The actuarial formulae involved in the cost of computations of such an annuity are dependent upon well recognized and established mortality tables.
The value of the survivorship annuity involved herein, which would pay Theresa E. Twogood $416.67 per month for the remainder of her life, was on April 28, 1944, the date of decedent's death, $19,328.57.
VAN FOSSAN, Judge:
The primary issue in this case is whether or not the decedent made a transfer under the provisions of section 811(c) of the Internal Revenue Code. The pertinent parts of section 811(c), as amended by P.L. 378 (1949) and made applicable by section 7(b) thereof to estates of decedents dying after February 10, 1939, are set out in the margin.
SEC. 811. GROSS ESTATE.The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated except real property situated outside of the United States.—(c) TRANSFER IN CONTEMPLATION OF, OR TAKING EFFECT AT, DEATH.—(1) GENERAL RULE.— To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise—(A) in contemplation of his death. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meanings of this subchapter; or(B) under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (i) the possession or enjoyment of, or the right to the income from, the property, or (ii) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; or(C) intended to take effect in possession or enjoyment at or after his death.(2) TRANSFERS TAKING EFFECT AT DEATH— TRANSFERS PRIOR TO OCTOBER 8, 1949.— An interest in property of which the decedent made a transfer, on or before October 7, 1949, intended to take effect in possession or enjoyment at or after his death shall not be included in his gross estate under paragraph (1)(C) of this subsection unless the decedent has retained a reversionary interest in the property, arising by the express terms of the instrument of transfer and not by operation of law, and the value of such reversionary interest immediately before the death of the decedent exceeds 5 per centum of the value of such property. For the purposes of this paragraph, the term ‘reversionary interest‘ includes a possibility that property transferred by the decedent (A) may return to him or his estate, or (B) may be subject to a power of disposition by him, but such term does not include a possibility that the income alone from such property may return to him or become subject to a power of disposition by him. The value of reversionary interest immediately before the death of the decedent shall be determined (without regard to the fact of the decedent's death) by usual methods of valuation, including the use of tables of mortality and actuarial principles, pursuant to regulations prescribed by the commissioner with the approval of the secretary. In determining the value of a possibility that property may be subject to a power of disposition by the decedent, such possibility shall be valued as if it were a possibility that such property may return to the decedent or his estate.(3) TRANSFERS TAKING EFFECT AT DEATH— TRANSFERS AFTER OCTOBER 7, 1949.— * * *
The decedent worked for a company which provided by a pension plan for the retirement of its employees. All but a small part of the cost of this plan was paid by the employer. The decedent was entitled to retire on a pension after 30 years of continuous foreign service for the employer. The Plan contained an option provision whereby the employee could elect, prior to his retirement, to take a lesser annuity on retirement and if the employee's designated beneficiary survived him that beneficiary would also receive an annuity for life. This option was exercised by the decedent in 1937, 5 years prior to his retirement date.
During 1938 decedent and his wife entered into a valid contract for good and valuable consideration by which, inter alia, he agreed not to change the designation of his then wife as his dependent annuitant. He completed his 30 years service and retired. He received payments on his retirement annuity until his death. Thereupon annuity payments were begun to the designated dependent beneficiary. The question is whether the decedent made a transfer under section 811(c) of the commuted value of the annuity received by his beneficiary.
It is appropriate to mention first the manner in which the parties have presented the litigated question. The case was heard on November 30, 1949; the amendment to section 811(c) referred to herein was approved October 25, 1949. The respondent in his notice of deficiency and on brief stated that the decedent made a transfer under section 811(c). The petitioner on brief has argued the applicability of section 811(c)(1)(B) and (C). The respondent on brief makes no formal concession as to the inapplicability of any part of section 811(c) but argues that section 811(c)(1)(B) is unaffected by section 811(c)(2). The respondent relies chiefly on Estate of William J. Higgs, 12 T.C. 280 which case was reversed in CA-3, 184 Fed.(2d) 427, since argument on the instant case was concluded. Because of the vague manner in which the ultimate issue has been framed and the nature of the authority on which the deposition of this case will largely rest, we deem it necessary to extend somewhat the scope of the argument of the parties. The question demands first an inquiry into the nature of what the decedent and the beneficiary had before and after the exercise of the option and, following that, what the beneficiary received on the decedent's death.
If the decedent continued to work for the full 30 years, his rights under the pension plan would ripen into an annuity which he would receive for the rest of his life. Prior to retirement, however, the benefits which he would receive in the future, beginning at retirement, were property rights, albeit they were conditioned on his continuing life and employment. This property was of a single but divisible form. In electing to receive less of this property on his retirement, the decedent divided the property into two parts, one of which he retained, the other he transferred to his beneficiary who could enjoy it only if she survived the decedent. If the beneficiary predeceased the decedent, the property so transferred was lost and it could not, under any circumstances, ever return to the decedent. The decedent's lesser annuity which he retained would in no way be augmented by the death of the beneficiary. On the death of the decedent after his retirement his wife surviving him, all of the conditions precedent to the enjoyment of the beneficiary's annuity had been removed. If the decedent had died prior to retiring, his estate would have received only $8,616, the amount of his contribution to the fund under the Plan.
It must be remembered that the property with which we are concerned here consisted of the right to receive an annuity. The division effected by decedent in electing to take a lesser annuity was a division of the property itself, part of which was the subject of the transfer— not the use by him for his life of only part of the income from the property.
In considering and applying the subject section of the Code, 811(c), we can first dispose of the exception in the ‘General Rule‘ that a transfer does not come within its provisions if it was a ‘bona fide sale for an adequate and full consideration in money or money's worth * * *‘ The petitioner makes some effort to exclude the transfer on that ground contending that the election, to the extent that it is deemed to be a transfer of property, was founded upon the separation agreement made between the decedent and his wife who had been elected as his beneficiary. The election was made some nine months prior to the separation agreement by the terms of which the decedent merely agreed not to change the election previously made. Therefore, the election (and to that extent, the transfer) was not made for ‘an adequate and full consideration.‘
It is apparent that section 811(c)(1)(A) cannot apply because the transfer in question was neither alleged nor shown to have been a transfer within the ordinary meaning of the ‘contemplation of death‘ provision.
The next section to be examined is 811(c)(1)(B). The question first presented here is whether the decedent ‘retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (i) the possession or enjoyment of, or the right to the income from, the property, * * *.‘ It is clear that the decedent did not possess or enjoy in any way the property transferred to the beneficiary. The reduced annuity which the decedent retained could never again be affected by what he transferred. The decedent left no strings attached to the property. He did not and, in fact, could not (because of the collateral agreement not to change the beneficiary designation) ever possess or enjoy the property transferred. Likewise, he did not retain possession or enjoyment of the income from such property. The annuity payments which the decedent received after his retirement did not flow from or have any relation to the property transferred. Such annuity payments— the property transferred— were irretrievably lost to decedent. In order for the decedent to have retained the income from property transferred, he must have made a transfer to the beneficiary of income yielding property, the income from which he reserved for his life. This manifestly he did not do, either from a legalistic analysis of the mechanics of the transaction or from a realistic view of the true nature of the transfer.
The query next arises, still under this section 811(c)(1)(B), whether the decedent retained ‘* * * (ii) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; * * *.‘ To state this question is, in this case, to answer it. If further discussion is indicated, however, it can be said that having made the election and collaterally having made it irrevocable, the decedent removed the possibility that any one except the named beneficiary would enjoy the property or its income. The decedent designated who would enjoy the property when he transferred it. He did not retain the right so to do.
The remaining question is whether the decedent made a transfer which, in the language of section 811(c), was ‘intended to take effect in possession or enjoyment at or after his death.‘ We believe the answer to the question thus limited should be in the affirmative if our premise above is correct, that ‘the benefits which he would receive in the future, beginning at retirement, were property rights.‘ This was such an estate passing at death as to bring it within the language of section 811(c)(1)(C). So to hold, however, is not an end of the matter. Applying section 811(c)(2), as we must, we find that it requires in unequivocal terms, that in order for the property to be included in the decedent's gross estate under section 811(c)(1)(C) as a transfer to take effect in possession or enjoyment at or after the decedent's death he must have retained a reversionary interest in the property arising by the express terms of the instrument of transfer and not by operation of law, and further, the value of such reversionary interest immediately before the death of the decedent must exceed 5 per centum of the value of the property transferred. This qualification to section 811(c)(1)(C) requiring a reversionary interest applies to transfers prior to October 8, 1949, and is, therefore, pertinent to the present inquiry.
No reversionary interest was retained by the decedent in the property transferred here. Under no circumstances could any part of what the decedent transferred ever revert to him or his estate. Having made the election irrevocable, his beneficiary was the only one who could ever enjoy the property. If she failed to survive decedent, the property was lost to both the parties concerned or to those who might take through them. Thus it is that, there being no reversionary interest as required by section 811(c)(2), there can be no application of section 811(c)(1)(C).
In order to present the several points in our opinion above in a certain sequence and because of differences in approaching the same result as reached by the Court of Appeals in reversing the Tax Court in Estate of William J. Higgs, supra, we have left until last our discussion of that case. Higgs and the instant case differ only in the following aspects:
(1) Higgs contributed nothing to the cost of his annuity whereas Twogood contributed $8,616.
(2) Higgs was eligible to retire when the election was made whereas Twogood made the election in 1937 and was not eligible to retire until 1942.
(3) Twogood agreed collaterally not to change the election so made. Higgs made no such agreement. (We have already disposed of the argument that the Twogood transfer was for a valid consideration.)
In all other respects the facts are similar, that is, the same Group cOntract No. 103, the same underwriter, and the same contract terms. The Tax Court held in Higgs that the arrangement was a transfer within section 811(c) following Commissioner v. Wilder's Estate, 118 Fed.(2d) 281, certiorari denied, 314 U.S. 634; Commissioner v. Clise, 122 Fed.(2d) 998, certiorari denied, 315 U.S. 812; and Mearkle's Estate v. Commissioner, 129 Fed.(2d) 386. The Third Circuit in reversing Higgs distinguished the above-cited cases as follows:
These three cases and Higgs were also relied upon in Estate of Mary L. Pruyn, 12 T.C. 754. That case was also decided prior to the 1949 amendment of section 811(c), and was reversed by the Court of Appeals for the Second Circuit on November 3, 1950. There the decedent and her younger sister purchased survivor annuity contracts from commercial companies, each paying one-half of the consideration. It was held, on appeal, that the decedent had retained no reversionary interest in what the surviving sister received on decedent's death.
The fact which distinguishes the present case from Commissioner v. Wilder's Estate, supra, Commissioner v. Clise, supra, and Mearkle's Estate v. Commissioner, supra, is that in each of these the decedent transferred property to the insurance company in purchase of an annuity for himself to be continued upon his death to his designated beneficiary, the beneficiary surviving. In the case at bar, however, there was no such transfer by the decedent, for the annuity contract was purchased by his employer. Without the option, the decedent had only a life interest under the contract made by his employer, contingent of course only upon his retirement, since he had already satisfied the retirement requirements. With the option, he had only a right to reduce his annuity in order to provide the annuity for his wife.
The Circuit Court further reasoned that:
We do not think it realistic to find that the decedent reserved to himself under the instrument of transfer (the exercised option), an interest for his lifetime in the ‘property‘ transferred to his wife, just because he did not (and perhaps could not) transfer his whole interest to her by depriving himself of any annuity whatsoever. The annuity which the decedent had was the inevitable result, not of the incidental exercise of the option, but of the contract which was arranged by and between his employer and the insurance company pursuant to which he was entitled to an annuity in any event.
We have reached the same result in our discussion under section 811(c)(1)(B) but on the theory that the decedent's right to receive an annuity was property, part of which he transferred to his wife, and that what decedent received under the annuity ‘did not flow from or have any relation to the property transferred‘; therefore, the decedent made no transfer ‘of income yielding property the income of which he reserved for his life.‘
We have concluded above that the decedent could not have retained a reversionary interest in the property which he transferred to his wife. In the Higgs case, on appeal, the Commissioner conceded that no reversionary interest existed in the decedent from his similar annuity. Although we might conclude that the question as to section 811(c)(1)(C), requiring a reversionary interest, has been abandoned by the Commissioner in this case, we have no such formal concession and for purposes of exposition in our opinion, we have set out in detail our reasons for arriving at the same result as did the Court of Appeals in Higgs where they say that it was conceded ‘and properly, that no reversionary interest is involved so as to bring this case within Section 811(c)(1)(Cy, that is, a transfer intended to take effect at death as that Section is extenuated by Section 811(c)(2).‘
The Court of Appeals does not find it necessary to deal with the question of whether the decedent's right to receive an annuity was property but preferred to conclude that ‘assuming a transfer of property, there was no such a transfer within the express meaning of Section 811(c) as amended in 1949.‘ As we have pointed out above, it is our opinion that the right to receive an annuity is property albeit receipt is conditioned on survivorship or continued employment. While the results which follow that view bring us to the same conclusion as reached by the Third Circuit, we have felt constrained to set out, as above, our approach to the problem.
We hold that the decedent did not make a transfer within the meaning of section 811(c) of the Code as amended by P.L. 378 (1949) in electing to receive a reduced annuity.
Several minor issues have been settled by stipulation.
Review by the Court.
Decision will be entered under Rule 50.