O'Shea v. Commissioner

ESTATE OF WILLIAM J. O'SHEA, DECEASED, WILLIAM J. O'SHEA, JR., VINCENT J. O'SHEA AND MAURICE C. O'SHEA, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. O'Shea v. Commissioner Docket No. 105942. United States Board of Tax Appeals 47 B.T.A. 646; 1942 BTA LEXIS 665; September 8, 1942, Promulgated *665 Decedent was a member of the New York Teachers' Retirement System and, upon his retirement as superintendent of schools of New York City, was entitled under the provisions of the law to an annual retirement allowance of $12,678.84. Under that law he exercised an option to substitute a retirement allowance of $9,137.60, coupled with a death benefit payable to his designated beneficiaries in the amount of the difference between the then value of his retirement allowance and the sum of the payments on account thereof which had been made at the time of his death. Held, that decedent at his death owned an annuity with an offsetting death benefit and the amount of such benefit then paid to his sons in accordance with his direction was not insurance within the meaning of section 302 :g) of the Revenue Act of 1936 and is includable in his gross estate under section 302:c) of that act. Helvering v. LeGierse,312 U.S. 531. William J. O'Shea, Jr., Esq., and Edward D. Burns, Esq., for the petitioners. W. G. Ryman, Esq., for the respondent. LEECH *647 Respondent determined a deficiency in estate taxes against the estate of*666 petitioners' decedent in the amount of $1,590.11. The issues are :1) whether all or any part of the sum of $41,020.68 paid upon the written request of the decedent, at his death, to his children by the Teachers' Retirement System of the City of New York, is within the meaning of section 302:g) of the Revenue Act of 1926 as amended, and, if not, :2) is such amount properly includable in the gross estate of the decedent for estate tax purposes, under section 302(c) of the same statute? We make the following findings of fact. FINDINGS OF FACT. 1. Petitioners are the duly qualified and acting executors of the will of William J. O'Shea, who died on January 16, 1936, 1939, a resident of the City, County, and State of New York. As such they filed their estate tax return with the collector of internal revenue for the third district of New York. 2. At the time of decedent's death he was the retired superintendent of schools. He retired on February 1, 1934, after almost 50 years of service as teacher, principal, district superintendent, associate superintendent, and finally the superintendent of the schools of the city of New York. 3. As a member of the New York City school*667 system, decedent was a contributor to and a member of the Teachers' Retirement System of the City of New York, hereinafter called the "System", which had been established on August 1, 1917, to replace the previous York City Teachers' Retirement Fund and of which the decedent had also been a member. 4. The System is an arrangement for the payment of retirement allowances to all employees of the Board of Education of the City of New York appointed as a result of examinations at annual salaries to regular positions. 5. The administration of the System is vested in the Retirement Board, the members of which are trustees of its funds. For the purpose of carrying out its functions, the Retirement Board possesses the powers and privileges of a corporation. *648 6. The funds of the System include :a) an annuity savings fund, :b) an annuity reserve fund, and :c) two pension reserve funds. The annuity savings and annuity reserve funds consist of the accumulated deductions with interest from the salaries of contributors. The pension reserve funds consist of contributions made by the city of New York. 7. Teachers who complete 35 years of service or who attain the age*668 of 65 are eligible for retirement upon demand, and all teachers who attain age 70 are compelled to retire. Teachers who retire under any of these conditions are granted a the following: :1) A from the city, which pension is paid out of the pension reserve funds; :2) an deductions to teacher's credit in the at the time of his retirement. Upon retirement the amount to teacher's credit in the fund so arranged that all system after August 1, 1917, are expected to receive retirement allowances of at least one-half of the average salary of their last 10 years of service upon service retirement, of which one-half of the allowance will be paid as the result of their own contributions and the balance will be provided by the city. 8. By granting the prior to August 1, 1917, and who became members of the System at that time, additional pensions on account of their past service, these teachers, including decedent, were put on substantially the same basis as the "new entrants" except that since the members, upon withdrawal from the System during their lifetimes or their designated beneficiaries upon the death of the members, were entitled only to the return of the contributions of the members*669 to the System, together with interest thereon, the because they had paid in less than the 9. A member of the System may at any time file with the Retirement Board his election of one of four options on his retirement, in each case the annuity payment being in a reduced amount. These options are: Option I. If he die before he has received in payments the present value of his annuity, his pension, or his retirement allowance, as it was at the time of his retirement, the balance shall be paid to his legal representative or to such person as he shall nominate by written designation duly acknowledged and filed with such board. The beneficiary nominated in such designation may be changed by the contributor at any time either before or after retirement by a new designation or designations filed prior to the death of the contributor. *649 Option II. Upon his death, his annuity, his pension, or his retirement allowance, shall be continued throughout the life of and paid to such person as he shall nominate by written designation duly acknowledged and filed with such board. Option III. Upon his death, one-half of his annuity, his pension, or his retirement allowance, shall*670 be continued throughout the life of and paid to such person as he shall nominate by written designation duly acknowledged and filed with such board. Option IV. Some other benefit or benefit or benefits shall be paid either to the contributor or to such person or persons as he shall nominate, provided such other benefit or benefits together with such lesser annuity, or lesser pension, or lesser retirement allowance shall be certified by the actuary of such board to be of equivalent actuarial value and shall be approved by such board. 10. On January 2, 1929, decedent executed and filed with the System the following election to take under option I: SELECTION OF BENEFITS UNDER OPTION ONE Date January 2, 1929 To THE TEACHERS' RETIREMENT BOARD OF THE CITY OF NEW YORK I, the undersigned, do hereby request and elect that the reserve on the retirement allowance payable to me upon date of retirement under the provisions of section 1092 of the Charter of the City of New York, as amended by Chapter 303 of the Laws of 1917, be used as provided in Option I of Subdivision O of that section, in providing for me a lesser retirement allowance, with the provision that if I should die*671 before I have received, in the monthly installments of my lesser retirement allowance, the amount of such reserve, the balance of such reserve in excess of the total amount of the monthly installments which I shall have received at the time of my death, shall be paid to my estate. * * * I further direct that should I survive the above-named beneficiary or beneficiaries and thereafter die before the monthly installments of my lesser retirement allowance amount to the reserve previously mentioned, the balance of such reserve in excess of the total amount of such monthly installments shall be paid to my estate or such other person as I shall hereafter nominate in accordance with the law. Teacher's Signature WILLIAM J. O'SHEA 11. On December 8, 1933, petitioners' decedent filed with the System his 31, 1934, and therein again similarly elected to receive on retirement the benefits provided under option I of the System. No physical examination was required of decedent at the time of his selection of option I. 12. Decedent retired form the System on February 1, 1934. 13. For the years 1929 to and including 1934 decedent received an annual salary of $25,000. 14. As*672 of February 5, 1934, decedent's net accumulated salary deductions on account of his membership in the System were $2,851.08. 15. On February 1, 1934, decedent was entitled to the following *650 retirement allowance under the provisions of the law on the basis of retirement tables approved by the Retirement Board: Fund from which payable Initial reserve Annual amount Monthly amount Annuity reserve fund $2,851.08 $393.84 $32.82 Pension reserve fund No. 1 1,556.39 215.00 17.91 Pension reserve fund No. 2 81,539.35 12,070.00 1,005.84 Total retirement allowance 85,946.82 12,678.84 1,056.57 16. As a result of decedent's election to receive this retirement under option I and having nominated his estate as beneficiary, he was entitled to the following allowances in lieu of those shown in the above table: Fund from which payable Annual amount Monthly amount Annuity reserve fund $283.80 23.65 Pension reserve fund No. 1 154.95 12.91 Pension reserve fund No. 2 8,698.85 724.90 Total retirement allowance 9,137.60 761.46 17. On February 20, 1934, the Retirement Board approved the retirement of decedent and authorized*673 the payment of the annual retirement allowance of $9,137.60 in monthly installments, as shown in the last foregoing table. After his retirement on February 1, 1934, at least until the date of this approval, petitioner had the unconditioned right to the entire retirement annuity of $12,678.84. On February 23, 1934, the Retirement Board notified decedent as follows: NOTICE OF RETIREMENT - Option No. 1 Dr. William J. O'Shea, Public School Supt. of Schools 145 West 88th Street, Borough All New York City. Dear Sir: Your application for retirement from active service in the position of Superintendent of Schools in the Department of Education was approved and the following annual service retirement allowance to be paid in monthly installments deated from Feb. 1, 1934 was authorized on February 20, 1934. FUND FROM WHICH PAYABLE ANNUAL AMOUNT Annuity Reserve Fund $283.80 Pension Reserve Fund No. 1 154.95 Pension Reserve Fund No. 2 8,698.85 Total Retirement Allowance 9,137.60 *651 As you have elected to have your retirement allowance payable in accordance with Option I, of Chapter 1022, Subdivision O, of the Greater New York*674 Charter, the Teachers' Retirement System of the City of New York will pay, in the event of your death, to your estate, an amount equal to $85,946.82, less the aggregate amount of the total retirement allowance payments, which you may have received prior to your death. Very truly yours, £ Signed] LOUIS TAYLOR, Secretary. 18. On December 6, 1934, decedent formally designated his sons, William J. O'Shea, Jr., Vincent J. O'Shea, and Maurice C. O'Shea, as beneficiaries under his election of option I, instead of his estate. It also contained the following provision: I further direct that should I survive the above named beneficiary or beneficiaries and thereafter die before the monthly installments of my lesser retirement allowance amount to the reserve previously mentioned, the balance of such reserve in excess of the total amount of such monthly installments shall be paid to my estate or such other person as I shall hereafter nominate in accordance with the law. 19. The decedent died on January 16, 1939, and in the following month each of his above named sons formally claimed from the System one-third of the amount payable upon his death. 20. On or about February 9, 1939, the*675 accountant of the teachers' retirement system computed the amount payable at decedent's death as $41,020.68. At a meeting of the teachers' retirement board held on February 21, 1939, the payment of $41,020.68 to William J. 0'Shea, Jr., Vincent J. O'Shea, and Maurice C. O'Shea was approved and authorized. 21. In the estate tax return filed by petitioners they reported a total of $55,137.19 as City of New York Teachers' Retirement System, 253 Broadway, New york, N. Y. :R5803) Reserve on decedent's pension $41,020.68 In computing the Federal estate tax due on the decedent's gross estate, petitioners took credit for the $40,000 exemption provided by section 302:g) of the Revenue Act of 1926 as amended, and included in the gross estate of the decedent the sum of $15,137.19, which was the balance as shown on the insurance schedule of their return after the deduction of the $40,000 insurance exemption. In computing the deficiency the respondent determined that the $41,020.68 paid under the provisions of the System to the three sons, designated beneficiaries of the decedent, was not insurance within the provision of section 302:g), supra, and included that*676 amount in the gross estate of decedent for Federal estate tax purposes under the provisions of section 302:c) of the Revenue Act of 1926 as amended. *652 OPINION. LEECH: At his retirement from the office of superintendent of schools of the city of New York petitioners' decedent became the owner of a right to an annuity of $12,678.84 from the System. ; certiorari denied, . With this right, decedent also acquired the option to surrender that right in exchange for an annuity in a lesser amount, $9,137.60, with a guarantee of minimum payments aggregating the reserve of $85,946.82, the value at retirement of his basic annuity, which guarantee included the right upon the part of decedent to designate a beneficiary to receive the unexhausted balance in the reserve, at decedent's death, and to change that beneficiary at any time. Decedent exercised this option, by virtue of which $41,020.68, the unexhausted balance of this reserve, was paid by the System upon the decedent's death to his designated beneficiaries. The issues are (1) whether all or any part of that payment is Revenue Act*677 of 1926 as amended, and, if not, (2) is such amount or any part of it properly includable in the estate of decedent for Federal estate tax purposes under section 302:c) of that same statute. That the city of New York had contributed $83,095.74 and decedent only $2,851.08 of the reserve set up by the System to meet its liability under its contract with decedent, does not seem to us significant in resolving these issues here. Nor is the fact important that the obligor on the contract was the System and not an insurance company. Cf. ; . In our opinion, when petitioners' decedent died, he owned a contract providing for the payment of an annuity to him and an offsetting death benefit to his named beneficiaries. The System assumed no risk obligation was neutralized by the annuity provision. Thus we think , is controlling. Upon the authority of that decision we hold, (1) that none of the contested payment is amended, and (2) all of it is properly includable in the estate of decedent for Federal estate tax purposes under section 302: *678 c) of the same act. Decision will be entered for the respondent.