Jones v. Comm'r of Internal Revenue

• Decision Date: 25 October 1943
• Docket Number: Docket No. 111443.
• Citation: 2 T.C. 924
• Parties: CHARLES L. JONES AND ERSIE C. JONES, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

2 T.C. 924

CHARLES L. JONES AND ERSIE C. JONES, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 111443.

Tax Court of the United States.

Promulgated October 25, 1943.

1. Petitioner, a retired employee of an oil company, received substantial sums annually under a retirement contract, which had been purchased by his employer from an insurance company and fully paid for by the employer. The cost of the contract had not been included (or includible) in petitioner's gross income in the year purchased or in the year when his rights under it had become vested. Held that the amounts received each year must be included in gross income and no portion thereof may be excluded under section 22(b)(2), I.R.C.

2. Prior to the taxable years petitioner, in the manner prescribed by the retirement contract, elected to receive less than the amount payable under it to the end that payment to his wife be made after his death in the event he predecease her. The Commissioner makes claim for an increased deficiency for each year, seeking to include in petitioner's gross income not only the amount actually received by him but also the difference between that amount and the sum which would have been payable to him if the election had not been made. Held the claim for an increased deficiency may not be allowed. George R. Sherriff, Esq., and Albert S. Rockwood, Esq., for the petitioners.

James C. Maddox, Esq., for the respondent.

This proceeding involves deficiencies in income tax for the years 1939 and 1940 in the respective amounts of $20,558.02. Two issues are raised by the respondent in an amended answer in which he seeks increased deficiencies. Stated generally, the first question is whether a retired employee is required to include in his gross income the amount received by him as ‘retirement payments‘ under a contract with an insurance company, the contract having been purchased and paid for wholly by his employer, or whether the amount to be included in his gross income is 3 percent of the aggregate premiums or consideration paid by the employer for the contract. The second, somewhat related to and contingent upon the conclusion reached under the first, is whether the employee must include in his gross income not only the amount actually received but the amount which he would have received annually if he had not elected to take a lesser amount to the end that his wife should be paid a sum annually for the remainder of her life after his death.

FINDINGS OF FACT.

Petitioners are husband and wife, residing at 300 Park Avenue, New York, New York. They filed joint returns of income for the years 1939 and 1940 with the collector of internal revenue for the second district of New York. The present controversy involves only amounts paid to, or contract rights of Charles L. Jones; so he will hereinafter be referred to as the petitioner.

Petitioner entered the employ of Atlantic Refining Co., a subsidiary of the Standard Oil Co., in 1891. About ten years later he was employed by the Vacuum Oil Co., a wholly owned subsidiary of the Standard Oil Co., and remained with that company until 1931. Vacuum merged with Standard Oil Co. of New York in 1931 and the latter changed its name, first to Socony Vacuum Corporation and later to Socony Vacuum Oil Co. Petitioner continued in the employ of the various companies until he retired in 1937. At that time he was a vice president, receiving a salary of $55,000 a year. The companies will hereinafter be referred to as ‘employer.‘

Early in 1931 employer entered into a ‘group contract‘ with the Metropolitan Life Insurance Co., hereinafter referred to as ‘insurer.‘ The date of issue of the contract is stated to ‘be deemed the first day of January, 1931.‘ The contract, together with the amendments thereto and the endorsements thereon, is included herein by reference.¹ Certificates were issued to the employees, reciting the benefit to which they were entitled. The certificates and the benefits provided thereunder were not assignable.

The contract between employer and insurer required specified payments to be made by each— by employer to insurer for ‘service annuities‘ to its (employer's) employees and by insurer to the employees. The general purpose of the contract was to provide a ‘retirement annuity‘ for each employee, based on service in the employ of employer. For services performed prior to January 1, 1931, the full cost of the annuity, at the established rates, depending on the age and sex of the employee, was payable by employer. payment of this sum was not required before the employee's retirement unless an option should be exercised by him which placed insurer under an obligation to make payment to him or his dependents. After January 1, 1931, contributions of employees, deducted from their pay, supplemented the amounts which were to be paid by employer.

The maximum annual rate of retirement annuity² under the contract as originally written was 75 percent of the employee's annual rate of pay during the last year of his employment prior to retirement from active service. By amendment effective January 1, 1934, he could receive 75 percent of a five-year average, if greater than the last year's pay; but if he had become eligible to retire at the completion of 40 years of domestic or 30 years of foreign service the date when he first became so eligible was to be considered the normal retirement date in determining the maximum to be received. The words ‘normal retirement date‘ were stated to mean the date on which the annuity payable should normally commence, which, as applicable to petitioner, was the certificate anniversary nearest his 65th birthday. By amendment effective January 1, 1934, an optional retirement date, viz., the completion of 40 years of continuous service, entitled an employee to the retirement annuity payments prior to the normal retirement date if written request therefor were made by him.

The contract contained several provisions with reference to the payments to be made by the employer and the employee. The employer was obligated to purchase, by one payment, on or before the employee's retirement, a ‘service annuity‘ for services performed prior to January 1, 1931, equal to 2 percent of the employee's last annual rate of pay times the number of years of continuous service but subject to the 75 percent maximum referred to above. Other stipulated payments were to be made by the employer which were to be the aggregate of the income stipulated payments as determined by a formula in the contract for the employees covered under it. The employer might, at any time, discontinue the payment of the stipulated payments and premiums, in which event the coverage under the contract was to cease. Such discontinuance, however, was not to be effective retroactively nor would it affect the amount or terms of any retirement annuity already purchased on account of service completed prior to such discontinuance.

Petitioner completed forty years continuous service in 1931. On July 1, 1932, employer delivered to him a certificate issued in his name certifying his rights under the contract. At that time he had not yet reached the retirement age of 65. He became 65 years of age in 1934 and became entitled under the contract to a life annuity of $41,250. The contract contained a provision under which he might, if he elected to do so, receive a life annuity of a reduced amount and have the annuity continue after his death to a designated dependent. Some time between January 1, 1934, and May 1, 1934, petitioner elected to receive a life annuity of $33,000 and an annuity of $24,882.53 for his wife for her life provided she survived him.³

Petitioner had contributed his share of the payments under the annuity contract up to 1934; however, because of his 40 years service, which at 2 percent per year would provide a past service annuity of more than the 75 percent maximum prescribed by the contract, his contributions were refunded to him.

The amounts paid by employer to the insurance company to provide for petitioner's retirement annuities were as follows:

+-------------------------+
                ¦Dec. 31, 1932 ¦$2,177.20 ¦
                +--------------+----------¦
                ¦Dec. 31, 1933 ¦4,257.00  ¦
                +--------------+----------¦
                ¦Jan. 1934     ¦12,162.64 ¦
                +--------------+----------¦
                ¦July 1, 1934  ¦522,995.38¦
                +--------------+----------¦
                ¦Total         ¦541,592.22¦
                +-------------------------+
                

The first two payments shown above represented the stipulated payments made by employer under the formula prior to the amendment effective January 1, 1934, which provided for retirement on the basis of continuous service regardless of age. The payment of January 1934 was required to provide for maturity of the retirement annuities as of January 1, 1934. The payment of July 1, 1934, was required because petitioner elected to provide an annuity for his wife out of his retirement annuity, and, he having had 40 years continuous service, the insurance company then became obligated to commence payments to his wife upon his death in the event that she should survive him. If such election had not been made payment would not have been required until he actually retired.

Between the date when petitioner became entitled to retire in 1934 and the date of his actual retirement in 1937 insurer refunded to employer amounts aggregating $88,460.48. This amount represented stipulated payments made by employer covering the period petitioner remained in its service after he became entitled to retire, during which annuity payments would have been payable to him if he had retired in 1934. The total net premiums or consideration paid for the contract under which the annuities for petitioner and his wife became payable was therefore $453,131.74, all of which was paid by employer.

The difference between a single life annuity of $41,250 payable to petitioner during his life and the annuity of $33,000, or $8,250, if paid to the insured...