National Shawmut Bank of Boston v. Commissioner of Corporations and Taxation

• Decision Date: 10 May 1968
• Citation: 354 Mass. 350,237 N.E.2d 290
• Parties: The NATIONAL SHAWMUT BANK OF BOSTON et al., Executors v. COMMISSIONER OF CORPORATIONS AND TAXATION.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 290

237 N.E.2d 290

354 Mass. 350

The NATIONAL SHAWMUT BANK OF BOSTON et al., Executors v. COMMISSIONER OF CORPORATIONS AND TAXATION.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued April 5, 1968.

Decided May 10, 1968.

Roger M. Thomas, Weston, for petitioners.

Paul N. Gollub, Asst. Atty. Gen., for respondent.

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

CUTTER, Justice.

The executors of the will of Eugene H. Bird seek abatement (G.L. c. 65, § 27, as amended through St.1953, c. 654, § 90, see later amendment, St.1967, c. 550, § 1) of an inheritance tax, so far as measured by (a) payments to Bird's widow under the pension plan of Eastern Gas and Fuel Associates (Eastern), and (b) the value of payments to her under an agreement made with Eastern by Bird prior to his retirement, for consulting services to be rendered after his retirement. The probate judge, upon a statement of agreed facts, reported the case without decision.

THE RETIREMENT BENEFITS UNDER EASTERN'S PENSION PLAN.

At his death on July 19, 1960, at the age of sixty-seven, Bird was an active, full time employee of Eastern. He was (and had been since 1951) a member of Eastern's 'Retirement Plan for Salaried Employees' (the pension plan). This plan provided not only for contributions to it by the employer on behalf of covered employees but also for limited employee contributions up to January 1, 1953. Bird had $3,879 to his credit in the plan for his own contributions. Eastern, as employer, had contributed $170,097.

In 1953, Bird named his wife as beneficiary after his death and requested optional retirement benefits under § X of the pension plan. By this choice, revocable by Bird (see plan, § X(5)) until his death, he 'agreed to accept an actuarial reduction in the payments * * * to him under * * * (the p)ension (p) lan during his lifetime after his retirement * * * with 100% of such reduced amount to continue after his death to his * * * widow until her death.'

Bird attained age sixty-five on June 23, 1958. His normal retirement date (§ IV(1) (1) of plan) would have been July 1, 1958. He remained active and planned to retire on July 1, 1961. He died before receiving during his life any payments under the pension plan. ¹ Under § X(3) of the plan (because he was over age sixty-five at his death), his wife became entitled at once to receive benefits as if Bird had retired on the first day of the month in which his death occurred. She thus will receive from July 1, 1960, monthly payments (§ X(3)) of $1,044.74 until her death, ² instead of the larger amount which would have been payable for sixty months to some beneficiary if Bird had not selected payment under § X. The effect of an employee's selection of the option under § X is further shown by the computation ³ which would have been made if Bird had retired at the normal retirement age of sixty-five. In any event, payments would have been at least equal to all contributions by Bird to the pension plan with credited interest. ⁴

THE AGREEMENT FOR CONSULTING SERVICES.

On May 6, 1960, Bird also entered into an agreement with Eastern for consulting services (the consulting agreement). By this agreement, Bird undertook to render consulting services to Eastern for five years after his anticipated date of retirement on July 1, 1961. For these services Eastern agreed (a) to pay Bird $20,000 each year for the five year period, and (b) if Bird should die after the execution of the agreement and before the end of the five year period, to pay to his widow an amount equal to one half of the amount Bird would have received during the remainder of the five year period (had he lived and performed his obligations under the contract) in equal monthly instalments over a period of five years from the first day of the month following his death. The payments were to terminate, in any event, at the widow's death. ⁵

Bird died two and a half months after executing the consulting agreement before receiving any payment under it. His widow then became entitled to payments at the rate of $10,000 per year in equal monthly instalments for five years from August 1, 1960, or until her death, if she should die during the period.

ASSESSMENT AND COLLECTION OF THE TAX.

The Commissioner of Corporations and Taxation determined that the widow's successions to payments under the pension plan and under the consulting agreement were subject to the inheritance tax imposed by G.L. c. 65. The commissioner valued the payments to be made to the widow (a) under the pension plan at $177,672.66, and (b) under the consulting agreement at $43,900. In total, the sum of $20,764.92 has been paid by the executors by reason of the commissioner's certifications of inheritance taxes due on various 'present' interests, including those on the widow's interests in the pension plan and under the consulting agreement.

1. The executors contend that the retirement benefits paid to Bird's widow under Eastern's pension plan have so many of the characteristics of life insurance, not taxable under G.L. c. 65, as to preclude any inheritance tax measured by them. The executors rest their arguments largely upon Tyler v. Treasurer & Receiver General, 226 Mass. 306, 115 N.E. 300, L.R.A.1917D, 633, and Cochrane v. Commissioner of Corporations & Taxation, 350 Mass. 237 238--240, 214 N.E.2d 283. See Barrett and Bailey, Taxation, §§ 1037, 1040; Casner, Estate Planning (3d ed. and 1966 supp.), p. 339, fn. 105; 13 Ann.Surv.Mass.Law, § 22.18; note, 47 B.U.L.Rev. 611, 612, 618. Any inheritance excise payable with respect to the pension plan benefits to Bird's widow must depend upon the general language of G.L. c. 65, § 1 (as amended through St.1955, c. 596; see later amendments through St.1967, c. 463). ⁶

Over half a century ago, in Tyler v. Treasurer & Receiver General, 226 Mass. 306, 310, 115 N.E. 300, 302, this court held 'that sums received by beneficiaries in accordance with designations made in contracts of (life) insurance are not subject to the succession tax.' The Tyler case was reaffirmed, and applied to life insurance trusts, in Welch v. Commissioner of Corporations & Taxation, 309 Mass. 293, 296, 34 N.E.2d 611, and in DeVincent v. Commissioner of Corporations & Taxation, 348 Mass. 758, 760--761, 206 N.E.2d 81, despite the broadening of Federal and State tax concepts ⁷ concerning transfers related to death which took place in the period after the Tyler decision in 1917.

In Gregg v. Commissioner of Corporations & Taxation, 315 Mass. 704, 709--711, 54 N.E.2d 169, 150 A.L.R. 1280, we limited the scope of the Tyler case to arrangements having the risk characteristics of life insurance, and declined to apply those principles to a retirement annuity contract of the 'refund' type. Under that contract, if the annuitant died before he had received the amount of the premium paid in by him to the insurance company, then a death benefit would be paid at the annuitant's death to a designated beneficiary in substantially the amount by which (a) the amount paid in premiums exceeded (b) the amount paid to the annuitant during his life in annuity benefits. Until his death, the annuitant reserved substantial rights to change the arrangement (pp. 706--707, 54 N.E.2d 169). The opinion, in effect, treated this revocable refund annuity arrangement as more akin to a revocable trust than to a life insurance policy. This court pointed out (p. 708, 54 N.E.2d 169) various distinctions between such a refund annuity arrangement and a life insurance contract. ⁸

In 1966, in the Cochrane case, 350 Mass. 237, 238--240, 214 N.E.2d 283, we had before us a situation somewhat similar to that presented by Bird's election to take reduced retirement payments under § X of Eastern's pension plan. An admiral, who retired in 1947, was entitled by statute to receive until his death monthly retirement pay of $744.70. Pursuant to the statute, he was also entitled (see pp. 238--239, 214 N.E.2d 283--284) to elect, and did elect in 1954, to provide a pension for his wife, if she should survive him, equal to one half of the retirement pay thereafter receivable by him, until per death or remarriage. This was to be paid for, in effect, by a reduction of the monthly amount thereafter payable to him. The amount of the reduction in the admiral's normal 'retirement pay necessary to justify the government commitment to make this payment to' his widow, was determined (pursuant to the statute) in accordance with an actuarial computation. We concluded that it was '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' in a manner 'comparable to the annuity options often available under life * * * policies' (see Commissioner of Internal Revenue v. Pierce, 146 F.2d 388, 389 (2d Cir.)). The government, we said, (pp. 239--240, 214 N.E.2d p. 285), 'upon the exercise of the option, took the new risk that * * * (the a)dmiral 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.' On balance, we concluded (p. 240, 214 N.E.2d p. 285) that 'the exercise of the option constituted a transaction having the characteristics of life insurance exempt from inheritance tax.' Cf. Old Colony Trust Co. v. Commissioner of Internal Revenue, 102 F.2d 380, 382 (1st Cir.).

Our decisions thus have interpreted G.L. c. 65, § 1, as having no application to benefits passing to named...