Jennemann v. Comm'r of Internal Revenue

• Decision Date: 07 March 1977
• Docket Number: Docket No. 7873—74.
• Citation: 67 T.C. 906
• Parties: C. T. JENNEMANN AND DORIS M. JENNEMANN, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

67 T.C. 906

C. T. JENNEMANN AND DORIS M. JENNEMANN, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 7873—74.

United States Tax Court

Filed March 7, 1977.

Held, merely because the U.S. Tax Court is established under art. I, not art. III, of the Constitution, it is not constitutionally prohibited from deciding this case. Held, further, I.R.C. sec. 402(a)(2) is not unconstitutional. Hugh R. Law, for the petitioners.

Paul K. Voelker, for the respondent.

OPINION

HALL, Judge:

Respondent determined a $557.91 deficiency in petitioners' 1971 income tax.

The issues for decision are:

(1) Whether this Court is prohibited from taking action herein since it is not established pursuant to the provisions of article III of the Constitution.

(2) Whether section 402(a)(2)¹ as applicable to petitioners' 1971 return violates the Fifth Amendment to the Constitution.

All of the facts have been stipulated and are found accordingly.

Petitioners C. T. and Doris M. Jennemann, husband and wife, resided in St. Louis, Mo., at the time they filed their petition herein. Doris M. Jennemann is a party to this case only by virtue of having filed a joint return with her husband. When we hereafter refer to petitioner, we will be referring to C. T. Jennemann.

From January 2, 1971, and continuing to the present, C. T. Jennemann has been an employee of the Kroger Co. Commencing at some point prior to January 2, 1971, petitioner was a participant in the Kroger Employees Savings and Profit Sharing Plan (Plan). On September 18, 1970, the Kroger Co's board of directors voted to terminate the Plan, effective January 2, 1971. Thereafter, on January 2, 1971, the Plan was terminated.

During 1971, petitioner received a lump-sum distribution of $8,557.83 from the Plan by reason of the termination. The distribution included amounts contributed to the Plan by petitioner and by Kroger, and earnings on those contributions. Petitioner correctly excluded from his computation of amounts allegedly subject to capital gains tax his contributions, determined by applying section 72(f). Petitioner correctly included the portion of the lump-sum distribution representing post-1969 employer contributions in gross income as ordinary income under section 402(a)(5).² However, petitioner reported as long-term capital gains that portion of his lump-sum distribution representing pre-1970 employer contributions. With this exception, respondent concedes that petitioners' treatment of the distribution was correct. However, respondent points out correctly that in the absence of death or a separation from service, which clearly did not occur here, the entire distribution in excess of personal contributions was required to be treated as ordinary income under section 402(a)(2)³ as it read in 1971.

Petitioner does not argue that respondent misread the statute. Instead, he raises constitutional objections to our power to decide the case and to congressional power to enact section 402(a)(2).

Petitioner first contends that the United States Tax Court cannot lawfully take action herein since it is not established pursuant to the provisions of article III of the Constitution. We addressed the identical issue in Burns, Stix Friedman & Co., Inc., 57 T.C. 392, 400 (1971), where we stated:

In our opinion Congress acted wholly within its constitutional power in creating this Court as an article I court without regard to the provisions of article III; and this Court may exercise the jurisdiction conferred upon it by Congress within violating article III. * * *

In Burns, Stix Friedman & Co., Inc. we thoroughly discussed the reasons for our conclusion that Congress had lawfully established the United States Tax Court as a legislative court under article I. We find the logic therein no less compelling today and adhere to our earlier conclusion.

Petitioner's final contention is that section 402(a)(2) as applicable to his 1971 return violates the Fifth Amendment to the constitution in that it confers tax benefits on certain employees and their widows while denying those benefits to petitioner. He argues that there is no rational basis or intelligible legislative purpose in conferring long-term capital gain treatment to distributees of lump sum distributions where the distribution is made ‘on account of the employees' death or other separation from service, or on account of the employees' death after his separation from service,‘ while denying such treatment to distributees of lump-sum distributions where the distribution is made on account of the termination of a qualified plan. Petitioner requests that we find the limitations within section 402(a)(2) violative of the Fifth Amendment and thereby grant long-term capital gain treatment to him.

Section 402(a)(2) provided generally in 1971 that certain lump-sum distributions from qualified plans will be afforded long-term capital gains treatment. This in turn allows a distributee a deduction equal to 50 percent of the gain realized or an alternative tax. See secs. 1201 and 1202.

Allowance of a deduction from gross income is not a matter of right or equity but depends upon legislative grace. Helvering v. Ind. Life Ins. Co., 292 U.S. 371, 381 (1934); New Colonial Ice Co., Inc. v. Helvering, 292 U.S. 435, 440 (1934); Deputy v. duPont, 308 U.S. 488, 493 (1940). However, the due process clause contained in the Fifth Amendment requires that any limitation on the grant of a deduction or of a preference be founded upon a rational basis. Brushaber v. Union Pac. R.R., 240 U.S. 1, 24—25 (1916); United States v. Maryland Savings-Share Ins. Corp., 400 U.S. 4, 6 (1970); Vivien Kellems, 58 T.C. 536, 558 (1972), affd. 474 F.2d 1399 (2d Cir. 1973). Where the limitations are implemented by means of a classification, that classification will not be set aside if any set of facts rationally justifying it is demonstrated or perceived by the courts. United States v. Maryland Savings-Share Ins. Corp., supra; Vivien Kellems, supra.

In providing such treatment for certain employees or their widows, Congress intended to provide relief to these individuals from any ‘bunched income’ problem, i.e., taxing at graduated rates income received in 1 year but accrued to a distributee over a number of years. H.R. Rept. No. 91—413 (Part I) 153—155 (1969), 1969—3 C.B. 200, 296—297; see United States v. Martin, 337 F.2d 171, 175 (8th Cir. 1964). Congress granted preferential treatment only to employees who retire or separate from service and widows of employees who die during the course of their employment. See S. Rept. No. 1631, 77th Cong., 2d Sess. 138 (1942), 1942—2 C.B. 504, 607. Congress specifically declined to grant such treatment to persons who received lump-sum distributions on termination of a plan on the grounds that such a provision would be an invitation to a variety of ingenious abuses. S. Rept. No. 1622, 83rd Cong., 2d Sess. 54 (1954).

We are able to perceive a rational basis for granting preferential capital gains treatment only to employees who retire or separate from service, and their widows, i.e., that Congress could have determined that these individuals are generally less able to pay taxes and generally more dependent on their pensions for a livelihood than employees who continue in their employment. Moreover, the denial of the preferential treatment to...