Gunnison v. Commissioner

Richard N. Gunnison and Vivian E. Gunnison, Petitioners v. Commissioner of Internal Revenue, Respondent Gunnison v. Commissioner Docket No. 6367-65 United States Tax Court 54 T.C. 1766; 1970 U.S. Tax Ct. LEXIS 61; September 30, 1970, Filed *61 Decision will be entered under Rule 50. Petitioner, as a named secondary beneficiary under qualified employee trusts (within the meaning of sec. 401(a) of the Internal Revenue Code of 1954), received lump-sum distributions therefrom after the death of the primary beneficiary. Held, such distributions were not made "on account of the employee's death" within the meaning of sec. 402(a)(2), I.R.C. 1954, and capital gains treatment is not allowed. John Blyer Callahan, for the petitioners. James F. Hanley, Jr., for the respondent. Forrester, Judge. Scott, J., concurring. FORRESTER *1767 Respondent has determined a deficiency in petitioners' Federal income tax for the year 1960 in the amount of $ 34,582.52. Concessions having been made, the only remaining issue for decision is whether certain lump-sum distributions received*63 by Richard N. Gunnison from the Enterprise Railway Equipment Co. Profit-Sharing Trust and the Enterprise Railway Equipment Co. Pension Trust qualify for capital gains treatment under section 402(a)(2) of the Internal Revenue Code of 1954. 1 FINDINGS OF FACT All of the facts have been stipulated. The stipulation and exhibits attached thereto are incorporated herein by this reference. Petitioners herein are Richard N. Gunnison (hereinafter sometimes referred to as Richard or petitioner) and his wife, Vivian E. Gunnison, who resided in Elmhurst, Ill., at the time the petition herein was filed. They filed their joint Federal income tax return for the year 1960 with the district director of internal revenue, Chicago, Ill. Richard's father, Walter L. Gunnison (hereinafter sometimes referred to as Walter), was an employee of Enterprise Railway Equipment Co. (hereinafter sometimes referred to as Enterprise). Until his death on December 24, 1958, *64 Walter was a participant in but did not contribute to a profit-sharing trust, which was adopted by Enterprise in 1945 and which qualified as an employees' trust within the meaning of section 401(a). The primary beneficiary of Walter's entire interest in the profit-sharing trust was his wife, Josephine Gunnison (hereinafter sometimes referred to as Josephine). If she predeceased him, died simultaneously with him, or died prior to complete disbursement of his interest to her, Richard and Walter L. Gunnison, Jr. (hereinafter sometimes referred to as Junior), were named secondary beneficiaries, to share equally in his interest in the profit-sharing trust. Section 13 of the profit-sharing trust agreement between Walter and Enterprise stated in pertinent part as follows: Section 13. Payment of Benefits. The adjusted closing balance of a Participant's account on retirement at normal or optional retirement date, permanent disability or termination of employment shall be paid to such Participant, and the adjusted closing balance of a deceased Participant's account shall be paid *1768 to his beneficiary or beneficiaries, by the Corporate Trustee in one sum or in installments during*65 a period not exceeding one hundred eighty (180) months thereafter, as directed by the Trustees. * * * * * * * Should a beneficiary die prior to the receipt of his share of such account, the trustees shall direct the Corporate Trustee to pay the undisbursed portion of his share to such other beneficiary or beneficiaries * * * Before his death, Walter also was a participant in, but made no contributions to, a pension plan and trust (hereinafter sometimes referred to as the pension trust) which had been adopted by Enterprise in 1951. This pension trust was also a qualified employees' trust within the meaning of section 401(a). On December 23, 1952, he designated Josephine as the primary beneficiary of his entire interest in the pension trust. If she predeceased him, died simultaneously with him, or died prior to complete disbursement of his interest to her, Richard and Junior were again named secondary beneficiaries, to share equally in Walter's interest in the pension trust. Section 6.2 of the pension trust agreement stated in pertinent part as follows: 6.2 The value of an Inactive Participant's account to which he is entitled after retirement or termination of employment shall *66 be paid by the Corporate Trustee to such Inactive Participant, and the value of an Inactive Participant's account to which he is entitled after death shall be paid by the Corporate Trustee to his designated beneficiary or beneficiaries, in one sum or in installments not exceeding one hundred and eighty (180) months, as directed in writing by the Trustees, following the accounting date on which the amount of his account is determined * * * * * * * Should a beneficiary die prior to the receipt of his share of such account, the Corporate Trustee shall pay the undisbursed portion of his share to such beneficiary or beneficiaries, and in such amount to each, if more than one, as said Participant shall have designated. The balance of Walter's account with the profit-sharing trust as of December 31, 1958 (some 7 days after his death), was $ 157,153.23, which amount was determined as follows: $ 119,453.20 Jan. 1, 1958, balance 8,510.32 1958 earnings 32,244.20 1958 appreciation 1,945.51 Enterprise's contribution 162,153.23 - 5,000.00 Distributed to Walter L. Gunnison (while on sick leave), 10/3/58 157,153.23 Balance On both January 15, 1959, and January 18, 1960, Josephine*67 received payment of $ 10,000, which were charged to the above accounts. The balances of Walter's account with the profit-sharing trust as of December *1769 31, 1959, and January 19, 1960, were $ 161,344.81, and $ 151,344.81, respectively, which were determined as follows: $ 157,153.23 Dec. 31, 1958, balance 6,687.05 1959 earnings 7,504.53 1959 appreciation 171,344.81 - 10,000.00 Payment to Josephine Gunnison, Jan. 15, 1959 1 161,344.81 Dec. 31, 1959, balance - 10,000.00 Payment to Josephine Gunnison, Jan. 18, 1960 1 151,344.81 Jan. 19, 1960, balance The balances of Walter's account with the pension trust as of December 31, 1958, and December 31, 1959, were $ 51,867.41 and $ 57,937.33, respectively, which were determined as follows: $ 33,330.35 Dec. 31, 1957, balance 2,835.00 1958 Enterprise's contribution 2,670.72 1958 earnings 13,031.34 1958 appreciation 51,867.41 Dec. 31, 1958, balance 2,271.68 1959 earnings 3,798.24 1959 appreciation 57,937.33 Dec. 31, 1959, balance *68 Josephine died on March 13, 1960. On April 26, 1960, and June 16, 1960, Richard received payments of $ 25,000 and $ 50,672.40, respectively, from his father's account with the profit-sharing trust. The balance in the account was distributed to his brother, Junior, during 1960. On July 8, 1960, Richard received $ 28,968.66 from his father's account with the pension trust with the balance in the account distributed to Junior on the same date. In their 1960 joint income tax return, petitioners reported the above payments as gain received from the sale or exchange of a capital asset held for more than 6 months. Respondent in his statutory notice of deficiency, determined that the payments were ordinary income. OPINION Richard received distributions from two employee trusts which were qualified employee trusts under section 401(a). Respondent argues that the amounts which he received from each trust are taxable as *1770 ordinary income under section 402(a)(1), 2 and do not qualify for capital gains treatment under section 402(a)(2), which, in part, states: (2) Capital Gains Treatment for Certain Distributions. -- In the case of an employees' trust described in section 401(a), *69 which is exempt from tax under section 501(a), 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 death or other separation from the service, or on account of the death of the employee after his separation from the service, the amount of such distribution, * * * shall be considered a gain from the sale or exchange of a capital asset held for more than 6 months. [Emphasis supplied.] Respondent argues that Richard did not receive the payments from either trust on account of an employee's death, but rather on account of the death of the primary beneficiary-distributee, his mother. Respondent concludes that the section 402(a)(2) requirement that the payments be received "on account of the employee's death" is not met and that the section is therefore inapplicable. *70 Respondent also argues that the term "total distributions payable," as defined in section 402(a)(3)(C)3 means the total amount in the employee's account at the time of death, separation from service, or death after separation from the service, and that this amount must be distributed within the same taxable year of all distributees in order for the recipient to be entitled to capital gains treatment. He cites section 1.402(a)-1(a)(6)(iv), Income Tax Regs., in support thereof, which states: Sec. 1.402(a)-1 Taxability of beneficiary under a trust which meets the requirements of section 401(a). (a) In general. * * * (6) (iv) If the "total distributions payable" are paid or includible in the gross income of several distributees within one taxable year on account of the employee's death or other separation from the service or on account of his death after separation from the service, the capital gains treatment is applicable. *1771 * * * However, if the share of any distributee is not paid or includible in his gross income within the same taxable year in which the shares of the other distributees are paid or includible in their gross income, none of the distributees is entitled*71 to the capital gains treatment, since the total distributions payable are not paid or includible in the distributees' gross income within one taxable year. Since the sums in the profit-sharing trust were not distributed within 1 taxable year to all distributees (namely, Josephine, Richard, and Junior), respondent concludes that capital gains treatment is precluded by this regulation. *72 Petitioners argue that the amounts received by Richard do qualify for capital gains treatment under section 402(a)(2) because "total distributions payable," as defined in section 402(a)(3)(C), means the amount to which each distributee is entitled, rather than the total amount in the account of the employee as of the time of the employee's death. They contend that Richard received the amounts to which he was entitled upon his mother's death and within 1 taxable year; and that under section 402(a)(2) said "total distribution" was paid "on account of the employee's death," because, but for Walter's death Richard would not have received the sums. As regards the applicability of regulations section 1.402(a)-1(a)(6)(iv), supra, to the distributions from the profit-sharing trust, petitioners contend that the regulations must be construed to separately apply only to one class of beneficiary-distributees at a time; primary or secondary, but not to both. They conclude that even though other primary beneficiaries would not have been eligible for capital gains treatments once Josephine received nonqualifying distributions, that secondary beneficiaries, being in a separate class, might*73 still qualify. Alternatively, petitioners argue that the regulation is invalid because the statute, properly construed, requires us to treat each distributee separately, irrespective of how amounts are paid to other distributees. We need not and do not decide the issues concerning the definition of "total distributions" and the applicability or invalidity of section 1.402(a)-1(6)(iv), Income Tax Regs., since in our view, Richard did not receive his distributions from either trust "on account of the employee's death." We construe the statute to require that the payment or payments to the distributee be made solely because of the occurrence of one of the three specified events (the employee's death, separation from service, or death after such separation). Since Richard received the distributions not solely because his father had died, but also because his mother, the primary beneficiary-distributee, had died without having *1772 received the entire amount of the funds, section 402(a)(2) is inapplicable. The interpretation of the phrase "on account of" was considered in Janet H. Gordon, 26 T.C. 763 (1956). In that case, an employee retired under *74 the New York State Employees' Retirement System and elected to take his retirement benefits under an option which provided that if he died before receiving annuity payments equal to the value of the annuity at the time of his retirement, the balance of his annuity was to be paid to his estate or a designated beneficiary. When he died, the remaining balance of the annuity was distributed in lump sum to his daughter. The Court held that under section 165(b) of the Internal Revenue Code of 19394 (hereinafter sometimes referred to as section 165(b)), the predecessor to section 402(a)(2), the lump sum was not eligible for capital gains treatment since it was not received by the daughter on account of the father's separation from the service but rather on account of his death after separation from the service. In so holding the Court adopted a literal interpretation of "on account of the employee's separation from the service," i.e., that that had to be the sole event that triggered the receipt of the money by the distributee. See also Estate of Frank B. Fry, 19 T.C. 461, affirmed per curiam 205 F. 2d 517 (C.A. 3, 1953); Edward Joseph Glinske, Jr., 17 T.C. 562 (1951).*75 While Congress, in enacting section 402(a)(2) in 1954, broadened the scope of section 165(b) to include capital gains treatment for amounts received "on account of the death of the employee after his separation from the service," it is clear that the interpretation placed on section 165(b) and the phrase*76 "on account of" by this Court, is that intended by Congress. As indicated in the report of the Committee on Ways and Means of the U.S. House of Representatives, H. Rept. No. 1337, to accompany H.R. 8300 (Pub. L. No. 591), 83d Cong., 2d Sess., p. 43 (1954), the addition to section 402(a)(2) was an extension of the statute, not a clarification of confused or obfuscated language. This report states: Under present law, lump-sum distributions paid under qualified trusteed plans because of separation from service are treated as long-term capital gains. However, similar distributions from insured plans are taxed as ordinary income. Moreover, regardless of the type of plan, lump-sum distributions to beneficiaries *1773 of covered individuals who die after terminating their employment are not entitled to capital gains treatment. This has resulted in considerable inequities and hardship. To grant equal tax treatment, your committee's bill provides long-term capital gains treatment for lump-sum distributions from both trusteed and insured plans if they are qualified, which are made either because of separation from service or because of the death of the covered individual after retirement. *77 The above legislative comment indicates that our literal interpretation of "on account of" is proper, and that the specified event, and that event alone, must precipitate the distribution in order for it to qualify under section 402(a). Likewise, a comment with regard to an interpretation of "total distributions payable" confirms this interpretation. In the report of the Committee on Finance of the U.S. Senate, S. Rept. No. 1622, to accompany H.R. 8300 (Pub. L. No. 591), 83d Cong., 2d Sess., p. 290 (1954), it is stated that amounts must become payable to the distributee "by reason of occurrence of the specified events." There is no indication whatsoever in the legislative history that "on account of the employee's death" is to be given a broad interpretation to extend it to the death of the initial beneficiary, or that "on account of" is to be interpreted differently with regard to different specified events. Should this phrase be interpreted as requiring the event to be a mere link in a chain of causalities, the coverage of the statute would be widely extended. We can find no foundation for this in the history, in the statutory wording, or the case law. We find and hold for respondent*78 that the payments were not received "on account of" Walter's death. Accordingly, they are taxable as ordinary income under section 402(a)(1) and section 72. Because of a concession, Decision will be entered under Rule 50. SCOTT Scott, J., concurring: I agree with the result reached by the majority but do not agree with the basis on which this result is reached. In my view, respondent's regulation requiring that in order to obtain capital gain treatment, the distribution, where made to more than one distributee, must be paid to or be includable in the gross income of all distributees within the same taxable year ( sec. 1.402(a)-1(a)(6)(iv), Income Tax Regs.) is a reasonable interpretation of the statute. The distributions from one of the funds involved in this case were made in 2 separate taxable years, since Josephine, the widow, received one distribution in 1959 and one in 1960 and the balance was distributed to petitioner Richard and his brother in 1960. The evidence is not sufficient to show that the distributions from the other fund were not made in 2 separate taxable years in that it is not clear that the widow did not receive a distribution from this fund in 1959. *79 The record shows *1774 that the balance of the second fund was distributed to Richard and his brother in 1960. I would hold that respondent's regulation is valid and that under that regulation petitioners are not entitled to capital gain treatment of the distributions Richard received, since the distributions were not paid to or includable in the gross income of all distributees within the same taxable year. Footnotes 1. All statutory references are to the 1954 Code unless otherwise stated.↩ 1. Respondent contends that these payments were properly chargeable against both the profit-sharing and the pension trusts and there is evidence to that effect, but since we have decided that the payments to petitioner were not made "on account of" the covered employee's death it is not necessary for us to resolve this dispute.↩ 2. SEC. 402. TAXABILITY OF BENEFICIARY OF EMPLOYEES' TRUST. (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 section 401(a)↩ which is exempt from tax under section 501(a) shall be taxable to him, in the year in which so distributed or made available, under section 72 (relating to annuities) * * * 3. (C) The term "total distributions payable" means the balance to the credit of an employee which becomes payable to a distributee on account of the employee's death or other separation from the service, or on account of his death after separation from the service. See also the language in H. Rept. No. 1337, to accompany H.R. 8300 (Pub. L. No. 591), 83d Cong., 2d Sess., p. A-147 (1954), wherein it is stated: "The term 'total distribution payable' is defined as the balance to the credit of an employee which becomes payable to a distributee by reason of occurrence of the specified events, so that partial distributions made prior to occurrence of the specified events will not defeat application of the capital gains treatment."↩ 4. (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.↩