Heard v. Comm'r of Internal Revenue, Docket No. 92220.

• Decision Date: 10 April 1963
• Docket Number: Docket No. 92220.
• Parties: EDWARD C. HEARD AND CORA L. HEARD, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

40 T.C. 7

EDWARD C. HEARD AND CORA L. HEARD, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 92220.

Tax Court of the United States.

Filed April 10, 1963

Henry C. Lowenhaupt, and Owen T. Armstrong, for the petitioners.

Claude R. Sanders, for the respondent.

Petitioner, a former employee of the United States, received a civil service retirement annuity, the aggregate amount of which receivable in the first 3 years was greater than the amount of retirement deductions withheld from his salary. Held, the amount received in excess of the retirement deductions is includable in gross income pursuant to sec. 72(d), I.R.C. 1954.

OPINION

BRUCE, Judge:

Respondent determined a deficiency in income tax for the taxable year 1958 in the amount of $509.07

The sole question for our determination is whether the sum of $2,224.99, ¹ received by petitioner Edward C. Heard during 1958 under the Civil Service Retirement Act, as amended, constitutes an annuity taxable to petitioners within the purview of section 72(d), I.R.C. 1954.

In the notice of deficiency, respondent decreased petitioners' medical expense deduction because of the increase in the amount of adjusted gross income determined. The correctness of this adjustment is dependent upon the determination respecting the issue stated above.

All of the facts are stipulated and the stipulation and exhibit attached thereto are incorporated herein by this reference.

Petitioners, Edward C. and Cora L. Heard, are husband and wife. They reside in St. Louis, Mo., and filed a joint Federal income tax return for the year 1958 with the district director of internal revenue in that city. For convenience, Edward C. Heard will hereinafter be referred to as petitioner.

Petitioner reached age 62 on April 23, 1956. He was a member of the Armed Forces of the United States and engaged in the military service of the United States from October 2, 1917, until about October 2, 1919. He was an employee in the classified civil service of the United States from on or about September 15, 1929, until on or about August 15, 1952. He was in the service of or under the United States (including military service and classified civil service) for 24 years, 10 months, and 6 days prior to August 15, 1952, on which day he retired from such service.

By virtue of such service, petitioner was entitled to benefits under the Civil Service Retirement Act (5 U.S.C. 2251-2267), and, as permitted by that Act, on or about August 15, 1952, he elected to receive an annuity commencing May 1, 1956, immediately after he attained age 62, in the amount of $181 per month as long as he might live. This amount was increased by law commencing August 1, 1958, to $199 per month. Pub. L. 85-465 (June 25, 1958), 72 Stat. 218. During the calendar year 1958 petitioner received monthly payments under the Civil Service Retirement Act totaling $2,244. He did not include any part of this amount in income on his Federal income tax return for 1958.

Retirement deductions withheld from petitioner's salary during all of his civilian Federal service totaled $3,639.01. No such deductions were withheld from his pay while in the military service.

From May 1956, when petitioner's annuity payments commenced, through December 31, 1957, petitioner received civil service retirement benefits totaling $3,620. On December 31, 1957, petitioner had recovered as benefits all of the retirement deductions withheld from his salary, except $19.01.

Petitioner's rights with reference to the retirement annuity are as set out in the Civil Service Retirement Act as originally enacted and from time to time amended.²

The respondent contends that the amounts received by the petitioner pursuant to the Civil Service Retirement Act are received as an employee's annuity and that $2,224.99 received in 1958 is includable in gross income pursuant to section 72(d), I.R.C. 1954.³

The petitioner contends that section 72 has no application here because it refers to amounts received as an annuity under an annuity, endowment, or life insurance contract, that there was no such contract between petitioner and the United States, and that petitioner had no contractual rights to an annuity or pension. Subsection (d) of section 72 refers to the amount receivable by the employee ‘under the terms of the contract’ and to the ‘consideration for the contract’ contributed by the employee. This, says the petitioner, implies a contract of the kind written by insurance companies for premiums where the consideration may be paid by the employee or the employer to the insurer in cash. The petitioner's argument continues:

The obligation to pay an annuity to petitioner was the obligation of the United States, which withheld amounts from petitioner's pay. But the amounts so withheld, even assuming the obligation to be in some sense contractual, were neither adequate consideration nor the entire amount contributed for the obligation. Clearly, a person not employed by the United States could not contribute only such amounts and receive a like pension or annuity. The additional reason (assumed here to be contractual consideration) for the annuity was petitioner's services. These were rendered, that is ‘contributed,’ by the petitioner, and hence, no part of the consideration was contributed by the employer, the United States. The annuity is paid by the United States, but this is very different from contributing consideration for an annuity contract. The insurance or annuity company which pays an annuity under its policy does not contribute any consideration for the annuity, but receives it, even though the total annuity payments exceed all the premiums it has received.

The petitioner argues that no consideration was contributed by the United States, that the amounts not paid from the petitioner's contributions and which are paid by the United States are dependent upon appropriations made at the discretion of Congress, and, since no legal process can compel Congress to appropriate such moneys, the part of the payments provided by the United States is a pension or gift. The retirement fund, says the petitioner, is not a true fund since it admittedly shows a deficit and requires appropriations to permit payment of the benefits provided. The petitioner refers to the cross reference in section 72(d)(3), stating: ,4 (d) EMPLOYEES' ANNUITIES.—

(3) CROSS REFERENCE.— FOR certain rules for determining whether amounts contributed by employer are includible in the gross income of the employee, see part I of subchapter D (sec. 401 and following, relating to pension, profit-sharing, and stock bonus plans, etc.).

The petitioner contends that section 401 and following sections have no application to the civil service retirement fund because the fund has no income, it is not a trust, it has no assets, being dependent upon appropriations by the Congress, and the United States is not a trustee subject to general equity jurisdiction; and that since payments to retired employees are dependent upon appropriations they are not ‘annuities' within the meaning of section 72. The petitioner refers to Rev. Rul. 60-235, 1960-2 C.B. 25, in which the respondent held that monthly payments to the widow of a Government employee under the authority of Public Law 85-465, enacted June 25, 1958, do not constitute amounts received as an annuity under section 72, for the reason that the total amounts payable are not determinable, being subject to the will of Congress to appropriate funds subsequent to June 30, 1960.

The petitioner cites Dismuke v. United States, 297 U.S. 167 (1936), as holding that a claim for benefits under the Civil Service Retirement Act was ‘founded upon a law of Congress' and not upon a contract with the United States as there contended.

The petitioner argues that either (1) his rights became nonforfeitable and fully realized as the latest in 1952 and taxable in that year at the then value of the future payments, or (2) that they are not contractual and are subject to recision by Congress, in which case the payments are gratuitous, a true pension, and not taxable income at all.

The Civil Service Retirement Act describes the retirement benefits payable under its provisions as annuities. It creates a fund to be known as the Civil Service Retirement and Disability Fund, which is appropriated for payment of annuities, refunds, and allowances under the Act. The Dismuke case, referred to benefits under that Act as annuities, not pensions. That case concerned a question of jurisdiction of claims either founded upon any law of Congress or any contract with the Government. In holding that the claim for civil service retirement benefits was founded upon a law of Congress, the Supreme Court did not decide whether it might also be founded upon a contract with the Government.

In Cecil W. Taylor, 2 T.C. 267 (1943), affirmed sub nom. Commissioner v. Miller, 144 F.2d 287 (C.A. 4, 1944), we held that amounts withheld as retirement deductions from the salary of civil service employees were includable within their gross income. The petitioners there contended that these amounts were not received by them actually or constructively. We pointed out that under the terms of the Retirement Act the employees were deemed to consent and agree to the prescribed deductions and that they acquired rights concerning the total amounts to their credit in the retirement fund. We said (p. 271):

These aspects of the retirement plan seem to us to demonstrate that there have been purchased by the employee substantial rights, of a value which can in no event fall materially below the amount of his own contribution, which presently belong to him, and which are unequivocally provided for his ultimate benefit under whatever contingency and in whatever circumstance the occasion for that benefit should arise. They are in that respect comparable to, and for our purposes indistinguishable from, an annuity contract, of which the...