Glinske v. Commissioner

Edward Joseph Glinske, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent Glinske v. Commissioner Docket No. 28456 United States Tax Court 17 T.C. 562; 1951 U.S. Tax Ct. LEXIS 79; September 28, 1951, Promulgated *79 Decision will be entered for the respondent. During the taxable year petitioner's employer discontinued an employees' pension trust plan, and, pursuant to an order of court, petitioner received, as one of the named beneficiaries, the major portion of his distributive share of the pension trust fund. Petitioner made no contribution to and received no distribution from the employees' pension trust during its continuance. Held, the distributive share received by petitioner during the taxable year was ordinary income and not long term capital gain. Edward Joseph Glinske, Jr., pro se. Jules I. Whitman, Esq., for the respondent. Rice, Judge. RICE *562 This case involves an income tax deficiency for the taxable year 1946 in the amount of $ 140.15. The only issue is whether the sum of $ 1,355.71 received by petitioner in 1946 from the Cochrane Corporation Pension Trust is ordinary income as determined by respondent or long term capital gain as reported by petitioner. FINDINGS OF FACT. Petitioner is an individual residing in Philadelphia, Pennsylvania. His income tax return for the taxable year was filed with the collector of internal revenue, Philadelphia, Pennsylvania. Petitioner was born on November 18, 1907. In 1942 and for many years prior thereto, petitioner had been continuously employed by the Cochrane Corporation. During 1942 the Cochrane Corporation set up a pension trust for the benefit of its employees. Petitioner was eligible to and participated*81 in the pension trust plan of the Cochrane Corporation from its inception to its discontinuance. *563 He made no contribution to the pension trust during its existence. The Fidelity-Philadelphia Trust Company was the trustee of the Cochrane Corporation's pension trust. The pension trust agreement was amended on December 1, 1944, January 19, 1945, and February 13, 1945. The pension trust, as amended, was approved as meeting the requirements of section 165 (a) of the Internal Revenue Code on February 17, 1945. Pertinent provisions of the amended trust agreement are as follows: First: (b) Provision for Retirement Income: Eligible employees who are fifty years of age or less at the time of entry in the Plan shall be eligible for retirement benefits upon the anniversary of the Plan nearest their sixtieth birthday; * * * Ninth: Termination of Employment Prior to Retirement: If an employee shall have been a member of the Plan for at least one year, and shall have reached his forty-fifth birthday, and shall have been an employee of the Corporation for ten years or more, then, upon his resignation or discharge from the service of the Corporation, he shall be entitled, either*82 (1) to receive the retirement income contract, annuity, policy or portion of the assets of the Plan allocated to the said employee, by transfer, assignment or delivery from the Trustee, or (2) to have the proceeds of such contract, annuity, or policy, or the allocated portion of the fund to which he may be entitled, paid to him * * * If an employee resigns or is discharged after being in the Plan for one year or more, and after being employed by the Corporation for ten (10) years or more, but has not reached his forty-fifth birthday, no further payments shall be made for his account by Corporation to Trustee and by Trustee as premium on his Retirement Income Contract, annuity, or policy, and on the anniversary of the Plan nearest his forty-fifth birthday, he shall be entitled to either (1) or (2) as above, * * * Twentieth: (b) The Corporation does not obligate itself to continue to maintain the Pension Trust established by this Pension Trust Agreement, but reserves the right to discontinue this Pension Trust in its entirety upon notice to the Pension Committee. In such event, the Pension Committee shall give thirty days' notice to the Trustee and to the employees who are included*83 under this Pension Trust, and the Trustee shall, upon being instructed in writing by the Pension Committee, assign, transfer, and set over to the employees included under this Pension Trust the several Retirement Income Contracts, annuities, or policies and/or the proceeds thereof, respectively, each to the employee in whose name or upon whose life the said contract or policy was issued, and such other property or assets, which at that time may be held by the Trustee, shall be distributed to the employees for whom held and the unallocated assets shall be distributed among the participants in the Plan and Trust at the time of termination in the same proportion as each participant is then otherwise entitled to a distribution of the assets then in the Plan. * * * On or about October 6, 1945, the Cochrane Corporation sold all of its assets including the use of its name and discontinued business. Petitioner continued in the employ of the purchaser. On or about October 26, 1945, the new management of the Cochrane Corporation exercised its right to and did discontinue the pension *564 trust plan in its entirety, the effective date of the discontinuance being the close of business, *84 November 28, 1945. Thereafter, a petition was filed in the Court of Common Pleas of Philadelphia County by the Fidelity-Philadelphia Trust Company, as trustee, seeking a distribution of the pension trust fund to the parties entitled thereto. One of the named beneficiaries was the petitioner, and the decree of the Court of Common Pleas awarded him $ 1,355.71. This amount was paid to and received by petitioner during the taxable year as his distributive share of the Cochrane Corporation pension trust fund. In his income tax return for 1946, petitioner treated the $ 1,355.71 as a long term capital gain. He explained his treatment of the distribution by stating that he surrendered his annuity contracts under the pension trust for cash which he received June 11, 1946, from the trustee. In 1948 petitioner received a further distribution of $ 235.54 from the trustee of the Cochrane Corporation pension trust fund. The petitioner received no distribution from the pension trust during its continuance. The distribution received by petitioner in the taxable year was not received on account of his separation from the service of his employer. OPINION. The question presented requires an interpretation*85 of section 165 (b), Internal Revenue Code, 1 and an application of the law to facts that are not in dispute. Petitioner contends that Congress, in writing section 165 (b), "intended the forepart thereof to cover the case of a distributee still joined with the service and the latter part thereof to cover the case of a distributee separated from the service (whether through discontinued plan or resignation or discharge the circumstances are entirely alike) and to preclude treatment of any proceeds whatsoever as gross income, since * * *." He argues that the forepart of section 165 (b) states that the amount distributed shall be taxed as if it were an annuity, which is not includible in gross income under section 22 (b), I. R. C., and that the latter part of section 165 (b) states that the amount distributed shall be considered a *565 gain from the sale or exchange of a capital asset held for more than 6 months. *86 Petitioner's arguments are based upon a misconception of the statute. The first portion of section 165 (b) relates to recurrent distributions from an employees' pension trust fund, and it provides that such distributions shall be taxable to the distributee in the year distributed or made available to him. It also provides the manner in which such distributions shall be taxed to the distributee, namely, under section 22 (b) (2) (B). 2 Here it is undisputed that petitioner contributed no amount to the pension trust fund, therefore, any distribution received by him from the pension trust fund represented no recovery of any capital invested therein. Under section 22 (b) (2) (B) and the first portion of section 165 (b), petitioner would have to include in his gross income the entire amount of any recurring distributions from the pension trust fund. *87 The second portion of section 165 (b) deals with the exceptional or unusual distributions from an employees' pension trust fund. It involves a situation where the total distributions are made from the trust fund to a distributee within one taxable year on account of the employee's separation from the service. Total distributions "on account of the employee's separation from the service" means that the distributions were made on account of the employee's separation from the service of his employer. Respondent's regulations show that this is his interpretation of the statute for he refers therein to total distributions to an employee in the year in which he retires or severs his connection with his employer, or to his widow if he dies during the course of his employment. Regulations 111, section 29.165-6. Our findings show that the Corporation exercised its right to discontinue its pension trust plan as it had the right to do under article twentieth (b) of its pension trust agreement. Pursuant to the provisions of that article, the trustee was required to transfer to the employees entitled thereto the several retirement income contracts, *566 annuities or policies and/or*88 the proceeds thereof, respectively. Petitioner, as one of the parties entitled thereto, elected to take the proceeds by surrendering his annuity contracts under the pension trust for cash. He received the major portion of his total distributions from the pension trust in 1946, and since he contributed nothing toward the purchase of the annuity contracts the entire distribution constituted ordinary income to him. Decision will be entered for the respondent. Footnotes 1. Sec. 165. -- EMPLOYEES' TRUSTS. * * * * (b) Taxability of Beneficiary. -- The amount actually distributed or made available to any distributee by any such trust shall be taxable to him, in the year in which so distributed or made available, under section 22 (b) (2)↩ as if it were an annuity the 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 one 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. 2. Sec. 22. -- GROSS INCOME. * * * * (b) Exclusions from Gross Income. -- The following items shall not be included in gross income and shall be exempt from taxation under this chapter: * * * * (2) Annuities, etc. -- * * * * (B) Employees' Annuities. -- If an annuity contract is purchased by an employer for an employee under a plan with respect to which the employer's contribution is deductible under section 23 (p) (1) (B), or if an annuity contract is purchased for an employee by an employer exempt under section 101 (6), the employee shall include in his income the amounts received under such contract for the year received except that if the employee paid any of the consideration for the annuity, the annuity shall be included in his income as provided in subparagraph (A) of this paragraph, the consideration for such annuity being considered the amount contributed by the employee. * * *↩