Estate of Schelberg v. C. I. R.

• Decision Date: 29 October 1979
• Docket Number: D,No. 3,3
• Citation: 612 F.2d 25
• Parties: 79-2 USTC P 13,321, 1 Employee Benefits Ca 2224 Estate of William V. SCHELBERG, Sarah J. Schelberg, Executrix, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. ocket 78-4192.
• Court: U.S. Court of Appeals — Second Circuit

Page 25

612 F.2d 25

79-2 USTC P 13,321, 1 Employee Benefits Ca 2224 Estate of William V. SCHELBERG, Sarah J. Schelberg Executrix, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 3, Docket 78-4192.

United States Court of Appeals Second Circuit.

Argued Sept. 12, 1979.

Decided Oct. 29, 1979.

John M. Vine, Washington, D. C. (John B. Jones, Jr., Washington, D. C., of counsel), for petitioner-appellant.

David I. Pincus, Washington, D. C. (M. Carr Ferguson, Asst. Atty. Gen., Tax Div., U. S. Dept. of Justice, Washington, D. C., of counsel), for respondent-appellee.

Before LUMBARD, FRIENDLY and GURFEIN, Circuit Judges.

FRIENDLY, Circuit Judge:

This appeal by a taxpayer from a decision of the Tax Court, 70 T.C. 690 (1978), raises a serious question with respect to the interpretation of § 2039, which was added to the Internal Revenue Code in 1954. ¹

I.

Decedent William V. Schelberg was born on March 14, 1914 and died on January 6, 1974 from lung cancer after a week's illness. He was survived by his wife, Sarah, and two daughters, one aged 23 and the other 19. He had been employed by International Business Machines Corp. (IBM) since 1952. At his death he was serving as assistant director of international patent operations at a salary of $4,250 per month.

IBM maintained a variety of employee benefit plans, each adopted at a different time and separately administered. Those here relevant are the Group Life Insurance Plan, the Retirement Plan, the Sickness and Accident Income Plan, and the Total and Permanent Disability Plan. Schelberg was entitled to participate in each.

The Group Life Insurance Plan provided two basic benefits a group term life insurance, which is not here at issue, ² and an uninsured and unfunded survivors income benefit, which is. This benefit, determined on the basis of the employee's compensation at the time of death and the amount of the aforementioned life insurance, was payable to a decedent's "eligible" survivors in an order of preference stated in the plan. Payment was to be made monthly, at the rate of one-quarter of the decedent's regular monthly compensation, until the total benefit was exhausted. Payments continued only so long as at least one eligible survivor remained.

The Retirement Plan was a qualified pension plan under I.R.C. § 401. Under IBM's general employment policy, Schelberg would have been required to retire at age 65 and would have been entitled to the retirement benefits provided in the plan.

Under the Sickness and Accident Plan all regular IBM employees were entitled to receive full salary (reduced by any workmen's compensation payments) while absent from work on account of sickness or accident for up to 52 weeks in any 24-month period. Benefits could be continued for more than 52 weeks at IBM's discretion in individual cases; these were known as "individual consideration" benefits.

The Disability Plan covered all IBM employees with more than five years' service. Eligibility was based on determination of "total and permanent disability" by a corporate panel on the basis of medical evidence. The quoted phrase was defined to mean that the employee was unable to perform any employment for pay or profit and had no reasonable expectation of becoming able to do so. Benefits were calculated on the basis of the employee's regular compensation prior to disability, taking account of eligibility for Social Security payments and workmen's compensation. They began on the expiration of the 52-week period of Sickness and Accident benefits plus any period of individual consideration benefits and continued until normal retirement date, at which time the employee became eligible for benefits under the Retirement Plan. ³ During the period of disability an employee remained covered by a variety of other IBM employee plans ⁴ and could, under certain conditions, accrue further credits under the Retirement Plan. ⁵ If, contrary to expectation, the employee became able to work again, he was entitled to return, but few did so. As of January 1, 1974, a total of 393 IBM employees out of 150,000 were receiving benefits under the Disability Plan.

At the time of his death Schelberg was not receiving benefits under any of these plans. By virtue of his decease his widow became entitled under the Group Life Insurance Plan to a death benefit of $23,666.67 under the group life insurance policy, and to a surviviors benefit of $1,062.50 per month. The value of the latter amount was not included in decedent's gross estate in his federal estate tax return, although its existence was reported. The Commissioner of Internal Revenue entered a notice of deficiency on the sole ground that the present value of the survivors annuity, which is stipulated to have been $94,708.83, was includible in the estate pursuant to I.R.C. § 2039, see note 1 Supra. The Tax Court upheld the Commissioner in a considered but somewhat Dubitante opinion by Judge Raum, see 70 T.C. at 705 and Infra, and the estate has appealed.

II.

The estate does not dispute that the survivors benefit constituted "an annuity or other payment receivable by any beneficiary by reason of surviving the decedent under any form of contract or agreement entered into after March 3, 1931 (other than as insurance under policies on the life of the decedent)" within the opening clause of § 2039(a). It is likewise indisputable that this alone would not suffice to make the survivors benefit includible in the gross estate. The Commissioner must also satisfy the condition that "under such contract or agreement, an annuity or other payment was payable to the decedent, or the decedent possessed the right to receive such annuity or payment, either alone or in conjunction with another 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."

Not contending that he can satisfy this requirement within the four corners of the Group Life Insurance Plan, the Commissioner asserts that, as provided by the Treasury Regulations, 26 C.F.R. § 20.2039-1(b), he is entitled to consider "any arrangement, understanding or plan, or any combination of arrangements or plans arising by reason of the decedent's employment". Although this is a rather sharp departure from the letter of the statute, see Pincus, Estate Taxation of Annuities and Other Payments, 44 Va.L.Rev. 857, 868-69 (1958), we accept it with the Caveat that while the Commissioner is entitled to "consider" such arrangements, this does not mean that the mere possibility of an employee's receiving some benefit under an arrangement other than that giving rise to the survivors benefit necessarily satisfies the condition of § 2039(a). The Commissioner does not rely on either the Retirement Plan or the Sickness and Accident Plan to satisfy the condition that "an annuity or other payment" was payable to Schelberg. Apart from other considerations, any such reliance is precluded by previous revenue rulings. ⁶ Revenue Ruling 76-380, 1976-2 C.B. 270, concluded that qualified plans, like the Retirement Plan, and non-qualified plans, like the Survivors Income Benefit Plan, were not to be considered together in determining the applicability of § 2039(a) and (b). See also Estate of Brooks v. C. I. R., 50 T.C. 585, 594-95 (1968). ⁷ Revenue Ruling 77-183, 1977-1 C.B. 274, held that benefits such as those Schelberg might have been entitled to under the Sickness and Accident Plan had he lived longer "were in the nature of compensation" and thus no more meet the test set out in the condition than would compensation payments themselves, Estate of Fusz v. C. I. R., 46 T.C. 214 (1966), acq. 1967-2 C.B. 2; see also Kramer v. United States, 406 F.2d 1363, 186 Ct.Cl. 684 (1969). This left as the Commissioner's sole reed the fact that, at the time of his death, Schelberg possessed the right that after 52 weeks (or more if he qualified for "individual consideration") under the Sickness and Accident Plan, he might become entitled to payments under the Disability Plan. The estate contends that Schelberg's rights under the Disability Plan were too dissimilar in nature from an "annuity or other payment" and too contingent to meet the condition of § 2039(a). We agree.

It is worth repeating that the Commissioner's position here would apply to every IBM employee having more than five years' service who dies before attaining age 64 (or taking early retirement) although he neither received nor had any reasonable expectation of receiving anything under the Disability Plan. On the other hand, if he died after attaining age 64 but before taking retirement, the survivors benefit would not be includible since the first twelve months away from work would be covered by the Sickness and Accident Plan and he could never become eligible for the Disability Plan. And, of course, if he died after actually taking retirement, the most common case, the survivors benefit would not be includible by virtue of Revenue Ruling 76-380, 1976-2 C.B. 270. We find nothing in the language of § 2039, in its legislative history, or in the Treasury Regulations sufficient to justify a conclusion that the action of an employer in creating a plan whereby a handful of employees can receive disability benefits because of a rare health or accident syndrome should bring the survivors of all within § 2039.

As recognized by a learned commentator shortly after § 2039 was enacted, the statute was aimed at "annuity contracts under which the purchaser (alone or with a joint annuitant) was entitled to payments for his life, with payments to continue after his death, at either the same or a reduced rate, to a survivor." Bittker, Estate and Gift Taxation under the 1954 Code: The Principal Changes, 29 Tul.L.Rev. 453, 469 (1955). While inclusion of the survivor's rights in the estate had been generally sustained, courts had differed as to the reason. Some courts had proceeded...