Cochrane v. Commissioner of Corporations and Taxation

• Decision Date: 08 February 1966
• Citation: 350 Mass. 237,214 N.E.2d 283
• Parties: Charlotte W. COCHRANE v. COMMISSIONER OF CORPORATIONS AND TAXATION.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 283

214 N.E.2d 283

350 Mass. 237

Charlotte W. COCHRANE v. COMMISSIONER OF CORPORATIONS AND TAXATION.

Supreme Judicial Court of Massachusetts, Middlesex.

Argued Jan. 6, 1966.

Decided Feb. 8, 1966.

James W. Noonan, Boston, for petitioner.

Herbert E. Tucker, Jr., Asst. Atty. Gen. (William A. Shue, Quincy, with him), for respondent.

Before WILKINS, C. J., and WHITTEMORE, CUTTER, KIRK and REARDON, JJ.

CUTTER, Justice.

This is an equity petition brought in the Probate Court seeking abatement of a succession tax assessed by the commissioner with respect to a Navy annuity and to death benefits paid or to be paid to Mrs. Cochrane, the widow of a vice-admiral in the United States Navy. Admiral Cochrane retired on November 1, 1947. He died on November 14, 1959. Mrs. Cochrane was named executrix of his will. By amendment to the petition she, in her capacity as executrix, was joined as a petitioner. Upon the pleadings and a stipulation constituting a case stated, the case has been reserved and reported without decision for the determination of this court.

The two principal issues are discussed separately below. One concerns Admiral Cochrane's exercise of a statutory option in connection with his Navy retirement pay. This, as has been stated, resulted in the payment of an annuity to Mrs. Cochrane beginning with his death. The other issue relates to death benefits paid to Mrs. Cochrane by the Massachusetts Institute of Technology (MIT) Pension Association.

The usual inheritance tax forms (L-1, L-3, L-16A) were filed with the Inheritance Tax Bureau. Attached to form L-3 was a schedule showing the annuity to be paid to Mrs. Cochrane by the Navy and the benefits paid to her by the MIT Pension Association. The Bureau's determination of the value of Admiral Cochrane's assets characterized these payments and benefits as 'property of' Admiral Cochrane passing 'by deed, grant or gift made or intended to take effect in possession after * * * [his] death.' The Bureau rejected Mrs. Cochrane's request for a revaluation omitting these items. A sum has been paid by Mrs. Cochrane, either as executrix or individually, on account of the inheritance tax, which represents 'the full inheritance tax which, as computed by * * * [her], would be due if' the Navy annuity and all MIT benefits were in effect subject to that tax.

THE RETIRED SERVICEMAN'S FAMILY PROTECTION PLAN.

Upon his retirement Admiral Cochrane became entitled to receive, until his death, retirement pay in monthly instalments of $744.70. On April 30, 1954, pursuant to what was at his death 10 U.S.C. § 1431 (1958) and related statutes, ^{1 1} he 'elected to provide a pension for' Mrs. Cochrane 'after his death in the amount of one half of the * * * retirement pay thereafter receivable by him to last until * * * [her] death or remarriage.' See 37 U.S.C. § 373(a) (Supp. II, 1955), option (1) at fifty per cent. See also 10 U.S.C. § 1434 (a) (Supp. v, 1958). As a result of this election his monthly retirement payments were reduced by $129.35, effective April 1, 1954. Thereafter his monthly retirement payment was $615.35. Upon his death, Mrs. Cochrane began to receive (effective November 1, 1959, see 10 U.S.C. § 1437 [1958]) monthly payments of $307.68, as a consequence of the admiral's election. 'The commuted value of the payments received and to be received by her * * * is $28,787.77.'

In essence, Admiral Cochrane accepted a reduction of $129.35 in his monthly retirement pay for the remainder of his life in return for a government obligation to pay to his wife, if she survived him, the sum of $307.68 per month from his death until her death or remarriage. The statute provided for an actuarial computation of the reduction in Admiral Cochrane's retirement pay necessary to justify the government commitment to make this payment to Mrs. Cochrane. See 37 U.S.C. § 373(c) and also § 377 (Supp. II, 1955); 10 U.S.C. § 1436, and also § 1443. In every sense, it was precisely as if the admiral had agreed to pay a monthly premium of $129.35 under a life insurance policy for a specified death benefit payable to his widow in equal monthly instalments during her life or until her remarriage. The arrangement is comparable to the annuity options often available under life insurance policies. See Commissioner of Internal Revenue v. Pierce, 146 F.2d 388, 389-391 (2d Cir.).

The government, upon the exercise of the option, took the new risk that Admiral Cochrane might live for a shorter period (thus permitting fewer deductions from his retirement pay) and that his wife might live longer than the actuaries expected, with the consequence that the government would lose by the bargain. Admiral Cochrane took the risks (a) that his wife would not survive him, or (b) that she would live less long after his death than the actuaries thought probable. There existed, when the option was exercised, the type of actual insurance risk regarded as essential to an insurance contract. See Helvering v. Le Gierse, 312 U.S. 531, 539, 61 S.Ct. 646, 85 L.Ed. 996.

We hold that the annuity from the Navy which Mrs. Cochrane began to receive at her husband's death had the characteristics of life insurance, which is not subject to the excise imposed by the Massachusetts inheritance tax law. No excise under G.L. c. 65, § 1, as amended, is due with respect to the receipt by Mrs. Cochrane either of the Navy annuity payments or of their commuted value. DeVincent v. Commissioner of Corps. & Taxn., 348 Mass. 758, 759-761, 206 N.E.2d 81, and cases cited. See Rev.Rul. 65-57, 1965-1 C.B. 56; Paul, Federal Estate and Gift Taxation, §§ 10.07-10.11. This is not an annuity of the type discussed in Gregg v. Commissioner of Corps. & Taxn., 315 Mass. 704, 707-709, 54 N.E.2d 169, 150 A.L.R. 1280, where the company paying the annuity 'took no risk whatever.'

In view of our conclusion that the exercise of the option constituted a transaction having the characteristics of life insurance exempt from inheritance tax, there is no occasion for considering Mrs. Cochrane's contention that, in any event, Admiral Cochrane's interest in the Navy retirement pay and the Navy annuity for her did not constitute his 'property' within the meaning of G.L. c. 65, § 1.

THE MASSACHUSETTS INSTITUTE OF TECHNOLOGY PENSION.

On September 1, 1947, Admiral Cochrane was appointed to a professorial post at MIT. Thereafter until his retirement on June 30, 1957, he was a member of the MIT Pension Association, which had been formed under G.L. c. 32, §§ 39 and 40. Its by-laws were first approved by the Commissioner of Insurance in 1927. The by-laws in effect at Admiral Cochrane's death were so approved in 1958.

While Admiral Cochrane was a member of the association, he contributed to the association $6,611.65 in salary deductions. On December 31, 1959, Mrs. Cochrane was paid by the association $16,591.38 in settlement of death benefits. ²

General Laws c. 32, § 41, relating to pension associations formed under c. 32, §§ 39 and 40, reads, 'The property of every such association, the portion of the wages or salary of an employee deducted or to be deducted under the two preceding sections, the right of an employee to an annuity, pension or endowment, and all his rights in the funds of the association, shall be exempt from taxation and from the operation of any law relating to bankruptcy or insolvency, and shall not be attached or taken on execution or other process to satisfy any debt or liability of the employer or of any member of the association. No assignment of any right in or to said funds or of any pension, annuity or endowment payable under section thirty-nine or forty shall be valid' (emphasis supplied). Mrs. Cochrane contends that, by virtue of this provision, no succession tax can be collected with respect to the death benefits paid to her by the association. She does not assert, however, that the MIT benefits have the characteristics of life insurance.

Under the by-laws of the association, members included most persons of professorial rank (with exceptions not here pertinent) on July 1, 1955, or appointed thereafter, and certain MIT staff members with five years of service. Salary deductions of five per cent of each member's base salary were to be paid into the pension fund by MIT. To these funds MIT was to add annually three per cent 'of the regular base salaries of all participating members.' MIT was obliged to pay to the association or to another MIT pension fund sums sufficient to permit the payment of pensions stated in § VII of the bylaws. ³

The commissioner contends that the exemption (§ 41) does not relieve Mrs. Cochrane of the excise imposed under G.L. c. 65, § 1, upon Mrs. Cochrane's privilege of succeeding to the death benefits, resulting from association funds in which Admiral Cochrane had at least an indirect interest at the time of his death. The excise, of course, is not a property tax upon the admiral's interest in the fund, although its economic and practical effect may be much the same as that of a property tax. Mrs. Cochrane submits that § 41 is broad enough in terms to preclude the commissioner's imposition even of this excise upon the death benefits.

Section 41 grew out of the report of the Special Commission on Old Age Pensions (Res.1907, c. 127), filed in January, 1910. See 1910 House Doc.No.1400, pp. 325-326, 348-349; Nichols, Taxation in Massachusetts (3d ed.) 246. Folliowing that report, St.1910, c. 559, was enacted. Section 3 contained a tax exemption provision in language which closely resembled the present provisions of § 41. Of this exemption, it was said in Opinion of the Justices, 324 Mass. 724, 731, 85 N.E.2d 222, that it was one of a class of exemptions which relate to 'property * * * devoted to uses of a public [or] quasi public * * * nature or to * * * charitable or philanthropic enterprises which tend in some measure directly or indirectly to relieve public burdens.' The intended scope of the exemption must be...