82 T.C. 843 (1984), 17956-80, Estate of Green v. C.I.R.
| Citation | 82 T.C. 843 |
| Opinion Judge | TANNENWALD, Judge: |
| Party Name | ESTATE OF ETHEL P. GREEN, DECEASED, DAVID L. GREEN, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Attorney | Joel E. Miller, for the petitioner. Robert J. Alter, for the respondent. |
| Case Date | May 30, 1984 |
| Court | U.S. Tax Court |
Page 843
Decedent was a public school teacher employed by the Board of Education of the City of New York. The Board purchased an annuity contract for decedent's benefit which petitioner seeks to exclude from decedent's estate. Held, the benefit is excludable under sec. 2039(c)(3), I.R.C. 1954; the Board is an educational organization under sec. 170(b)(1)(A)(ii), I.R.C. 1954, which is exempt from tax under sec. 501(a), I.R.C. 1954.
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OPINION
Respondent determined a deficiency of $165.29 in petitioner's Federal estate tax. The sole issue for decision is whether the value of an annuity contract purchased by decedent's employer, a city school board, for the decedent's benefit is excludable from decedent's estate under section 2039(c)(3). [1]
This case was submitted fully stipulated pursuant to Rule 122. The stipulations of fact and exhibits attached thereto are incorporated herein by this reference.
Petitioner is the estate of Ethel P. Green, represented by its executor, David L. Green. At the time he filed the petition herein, David L. Green resided in Jamaica, N.Y. Ethel P. Green (the decedent) died in New York on April 11, 1976.
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The decedent was a teacher employed by the Board of Education of the City of New York (the City Board) and a participant in the City of New York Teachers' Tax Deferred Annuity Program (the Annuity Program). Pursuant to the Annuity Program, decedent and the City Board entered into an agreement under which amounts were withheld from the decedent's salary and used to purchase a retirement annuity contract. Respondent admits that the amounts withheld were properly excluded from the decedent's gross income under section 403(b), i.e., that the City Board purchased the annuity.
An annuity benefit of $28,411.07 was paid pursuant to the annuity contract to a named beneficiary after decedent's death. Petitioner timely filed a Federal estate tax return which included $27,805.44 of the annuity benefit[2] in decedent's gross estate. Subsequently, petitioner filed an amended estate tax return claiming that the annuity benefit was excludable under section 2039(c)(3) and seeking a refund of $8,180.74. A claim for this amount as an overpayment is included in the petition herein.
Public education in New York City is governed, in part, by state statute. The city's educational system is composed of one city-wide board of education (the City Board) and 32 community school boards; the City Board employs a Chancellor (in effect, a superintendent of schools). The City Board is a corporate body under section 2551 of the New York Education Law. The community boards are creatures of the City Board in that the City Board defines the boundaries of the community districts and the number of members on each community board. N.Y. Educ. Law section 2590-b (McKinney 1981). The City Board has sole jurisdiction over the City's high schools (with certain " experimental" exceptions not relevant herein); jurisdiction over the lower schools is split between the City Board and the various community school boards. Each community board sets policy for the elementary, intermediate, and junior high schools within its jurisdiction subject to the city-wide policies, rules and regulations of the City Board and the Chancellor. Any action taken by a community school board is subject to City Board policy, and can be appealed in the first instance to the Chancellor, and, in the second, to the City Board. The
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Chancellor has the statutory authority to supersede or suspend a community school board for failing to comply with any applicable law, regulation, directive or agreement, including those issued by the City Board and the Chancellor. N.Y. Educ. Law section 2590-h (McKinney 1981).
The community school boards' powers are subordinated in many other significant ways to those of the City Board. All teachers are hired by the City Board and then assigned to the community school districts. The Chancellor sets minimum teaching standards for all elementary, intermediate, and junior high school teachers; implementation of such standards and elaboration thereof is the responsibility of the community school boards. The Chancellor also mandates, pursuant to City Board policy, many educational programs, promotional standards, tests and evaluations at all levels. All funding received by the community school boards, with the exception of some specific competitive grants which comprise a small percentage of the community school districts' budgets, is allocated directly by the City Board. Textbooks are purchased by the community school boards with funds allocated by the City Board and from a list which has already been approved by the City Board. All school buildings are owned by the City of New York for the benefit of the City School District.
The sole issue for decision is whether the annuity contract purchased for decedent is excludable, under section 2039(c)(3), from decedent's estate. Section 2039(c)(3) provides an exclusion from the gross estate for " the value of an annuity * * * receivable by any beneficiary (other than the executor) under * * * [a] retirement annuity contract purchased for an employee by an employer which is an organization referred to in section 170(b)(1)(A)(ii) or (vi) * * * and which is exempt from tax under section 501(a)." Thus, this annuity benefit is excludable from decedent's estate only if the New York City Board of Education meets the requirements of both section 170(b)(1)(A)(ii) or (vi)[3] and section 501(a).
A section 170(b)(1)(A)(ii) organization is " an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of
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pupils or students in attendance at the place where its educational activities are regularly carried on."
Section 501(a) provides, inter alia, that section 501(c)(3) organizations are exempt from taxation. Section 501(c)(3) organizations include-
Corporations, and any community chest, fund, or foundation, organized and operated exclusively for * * * educational purposes * * *, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation, * * * and which does not participate in, or intervene in * * * any political campaign on behalf of any candidate for public office.
We first address respondent's argument that the City Board is not exempt under section 501(a) because it never " established" its-exemption by filing for a determination letter or revenue ruling to that effect. Respondent points to section 1.501(a)-1(a)(2), Income Tax Regs., which provides that-
An organization, other than an employees' trust described in section 401(a), is not exempt from tax merely because it is not organized and operated for profit. In order to establish its exemption, it is necessary that every such organization claiming exemption file an application form * * *.
The admonition that an application for exemption must be submitted has been repeated in several revenue rulings. See, e. g., Rev. Rul. 74-15, 1974-1 C.R. 126; Rev. Rul. 67-291, 1967-2 C.B. 184; Rev. Rul. 67-290, 1967-2 C.B. 183; Rev. Rul. 60-384, 1960-2 C.B. 172.
In Savings Feature of Relief Dept. of B& O R.R. Co. v. Commissioner, 32 B.T.A. 295 (1935), the Board of Tax Appeals held that " establishment of exemption" language similar to that in section 1.501(a)-1(a)(2), Income Tax Regs., did not require an organization to file proof of its exemption as a condition precedent to the right of exemption. " The penalty for failure to comply seems to be," the Board continued, " that the Commissioner, if he has doubts of the exempt character of any organization, may assess the tax and put that organization to the trouble of proving elsewhere its right to exemption." 32 B.T.A. at 306. Congress interpreted this language in the same way and, in 1969, added section 508 to the Code to make an application for exemption mandatory for most organizations
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organized after October 9, 1969. As the House Report clearly stated-
Under present law, an organization is exempt under section 501(c)(3) of the code if it meets the requirements of that provision. Although many organizations apply to the Internal Revenue Service for " exemption certificates," the law does not require them to do so. [H. Rept. 91-413, 37 (1969), 1969-3 C.B. 200, 224. See also S. Rept. 91-552, 53 (1969), 1969-3 C.B. 423, 458.][4]
The City Board was clearly in existence as a corporate body prior to October 9, 1969 (N.Y. Educ. Law sec. 2551 (McKinney 1981)), and respondent's argument that the record herein is silent on the point is without merit.
Respondent also contends that the City Board is not " an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on" (as required by section 170(b)(1)(A)(ii)). Respondent's contention is based on the supervisory role the City Board exercises vis-a-vis the community school districts; the City Board is not, respondent contends, involved in the actual educational activities (the presentation of formal instruction) of a school. To accept respondent's contention would mean that any school system, public or private, with more than one school might be precluded from being classified as a section 170(b)(1)(A)(ii) organization. The City Board employed all the teachers in the City's public...
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