Rosenberg v. Comm'r of Internal Revenue (In re Estate of Rosenberg)
| Decision Date | 19 May 1986 |
| Docket Number | Docket No. 20654-84. |
| Citation | 7 Employee Benefits Cas. 1649,86 T.C. No. 60,86 T.C. 980 |
| Parties | ESTATE OF FREDERICK ROSENBERG, Deceased, PETER D. ROSENBERG, v. Co-Executor, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Decedent participated in a retirement plan of his employer pursuant to which he had an option, among others, to provide for a combination of retirement income for himself and death benefits for any designated survivor or survivors. At his retirement in 1974 the decedent set aside certain lump sums to be paid to specified beneficiaries at his death, thus reducing the amount of his pension actuarially computed. He died in 1980. One such lump sum ($25,000) was thus paid to his son Peter. The son reported that amount as capital gain in his own income tax return, as permitted by sec. 402(a)(2), I.R.C. 1954. HELD, the $25,000 lump sum is includable in the decedent's gross estate under sec. 2039(a). HELD FURTHER, that amount is not rendered excludable by section 2039(c), which would otherwise be applicable here, since an amendment to section 2039(c), enacted in 1978, provided for an exception to its exclusionary provisions in the case of ‘an amount described in subsection (f)‘, which was also enacted in 1978; and as construed herein, the $25,000 was an amount described in subsection (f) since it failed to come within the exception to subsection (f) set forth in paragraph (2) of subsection (f) by reason of the son's reporting that amount as capital gain. The exception set forth in paragraph (f)(2) was explicitly conditioned upon the distributee's treating the distribution as taxable under sec. 402(a)‘without the application of paragraph (2) thereof‘. The effect of such reference to paragraph (2) of sec. 402(a) is to prevent classifying the $25,000 payment as an amount not ‘described‘ in section 2039(f) since the son reported it as capital gain on his own income tax return. HELD FURTHER, the result is not violative of the Fifth Amendment.
2. Decedent made inter vivos gifts to his son Peter aggregating more than $3,000 in each of the three years preceding his death. Such gifts required the filing of gift tax returns since they exceeded $3,000 in each year. HELD, sec. 2035(a), as revised by the Revenue Act of 1978, Pub. L. 95-600, 92 Stat. 2930, and applicable for all years beginning in 1977 (with the exception of 1977 itself for which a transitional rule was later provided), required the inclusion in the gross estate of all gifts to one person totaling over $3,000 in one year if made within three years of death without any exclusion for the first $3,000 of such gifts to each person in each year. HELD FURTHER, the statute as thus applied is constitutional. Peter D. Rosenberg, for the petitioner.
Warren P. Simonsen, for the respondent.
The Commissioner determined a $19,724 estate tax deficiency in respect of the estate of Frederick Rosenberg, who died in 1980. After concessions, two issues remain in dispute: first, whether a $25,000 payment to decedent's son Peter pursuant to a retirement plan covering the decedent is includable in the decedent's gross estate under section 2039, I.R.C. 1954; and second, whether the first $3,000 of gifts by the decedent to Peter in each of the years 1978 and 1979 are includable in decedent's gross estate under section 2035. The case was submitted on the basis of a stipulation of facts and attached exhibits.
Petitioner is the Estate of Frederick Rosenberg. The decedent resided at his death in Long Island City, New York. His will was probated in the Surrogate's Court of Queen's County. New York. The co-executors are his two sons, Peter and Edward. Peter acts also as the estate's attorney. At the time the petition herein was filed, Peter resided in Arlington, Virginia, and Edward resided in New York.
The decedent was born on December 16, 1903. He died testate on February 11, 1980, a widower, survived by his two sons and three grandsons (Edward's children), Jeffrey, Steven and Douglas.
From 1939 until 1974 the decedent was employed by the city of New York as an assistant general clerk of the Queen's County Supreme Court for the State of New York. As an employee of the city of New York he participated in the New York City Employee's Retirement System (the NYCERS or the Retirement Plan) — a qualified trust described in section 401(a), I.R.C. 1954, and made exempt by section 501(a), I.R.C. 1954.
The New York City Retirement System is a plan which allows the employee to choose the form in which he will receive the benefits to which he is entitled. The employee can take his benefits in a self- designed combination of retirement income for himself and death benefits for his survivors. A decision by the employee to have benefits paid to survivors on his death would have the effect of reducing the employee's retirement allowance.
An employee's choices with respect to the form in which he can receive his benefits are described in a booklet entitled ‘The New York City Employees' Retirement System Options‘ (sometimes hereinafter referred to as ‘Options ‘), which is distributed to New York City employees by the NYCERS. The choices therein are labelled ‘No Option‘, Options 1, 2, 3, 4, 4-2, 4-3 and ‘The Split Option‘.
Upon his retirement from employment with the City of New York in 1974, decedent elected Option 4 of the Retirement Plan. Under Option 4, the decedent set aside a total of $50,000 in lump sum benefits to be paid on his death directly to the following beneficiaries in the following amounts:
+---------------------------------------+
¦Name ¦Amount ¦
+-------------------------------+-------¦
¦Peter D. Rosenberg (son) ¦$25,000¦
+-------------------------------+-------¦
¦Jeffrey S. Rosenberg (grandson)¦8,333 ¦
+-------------------------------+-------¦
¦Stephen M. Rosenberg (grandson)¦8,333 ¦
+-------------------------------+-------¦
¦Douglas J. Rosenberg (grandson)¦8,333 ¦
+---------------------------------------+
Only the $25,000 distributed to Peter Rosenberg is now in controversy.
For each unit of $1,000 set aside, decedent's retirement allowance was reduced by an actuarially determined amount. The ‘Options‘ booklet contains the following information with respect to Option 4:
Because this benefit is not based on age or sex of the beneficiary, you may change your beneficiary.
At the time of your death, your beneficiary may elect to receive the lump sum benefit or, alternatively, may elect to receive an annuity in lieu of the lump sum.
In 1981 the above sums were distributed to the above-named beneficiaries.
During 1977, 1978 and 1979, decedent transferred by gift a total of $39,070 to Peter. Total gifts for each year exceeded $3,000.
On the Federal estate tax return, each of the recipients of the lump sum distributions elected to have his share excluded from the gross estate. The propriety of such exclusion, as will hereinafter more fully appear, would depend upon the distributee's reporting the amount received as income on his own income tax returns in a specified less favorable manner than would otherwise be allowed. In purporting to exercise such income tax option on their respective 1981 income tax returns, Peter did not utilize the 10-year averaging method but reported his $25,000 distribution as capital gain, and each of the three grandsons reported his respective $8,333 distribution as ordinary income on Form 5544, using the special 10- year averaging method.
In the notice of deficiency, the Commissioner increased the taxable estate by the $50,000 in distributions on the ground that ‘this sum is an asset includible in the gross estate under section 2039 of the Internal Revenue Code.‘ Shortly after the Commissioner's notice, each of the three grandsons made an irrevocable election and amended his 1981 income tax return to treat his distribution as ordinary income without the special 10-year averaging. As a result of this change in income tax treatment by the grandsons, the Commissioner now accepts the exclusion of their survivor's benefits from decedent's gross estate. Still in controversy, however, is the $25,000 payment to Peter that was excluded from decedent's gross estate and which Peter reported in his own income tax return as capital gain.
Also on the estate tax return, on Schedule G-Transfers During Decedent's Life, there was reported $20,000 in inter vivos cash transfers made by decedent after December 31, 1976, and within three years of his death. Since such transfers actually totalled $39,070, the Commissioner increased the taxable estate by $16,070—the amount of the unreported transfers, $19,070, minus $3,000 that he found excludable in respect of the 1977 gifts under a special transitional rule changing the effect of section 2035(b)(2) for gifts made in 1977. The Commissioner did not allow similar $3,000 exclusions for the 1978 and 1979 gifts, as to which amendatory provisions of section 2035(b)(2) were deemed to be effective and which were regarded as requiring a different result. Petitioner now claims similar $3,000 exclusions for the years 1978 and 1979.
1. THE $25,000 PAYMENT TO PETER. Petitioner challenges the includability of the $25,000 payment in the decedent's gross estate under section 2039 of the Code on both statutory and constitutional grounds. It is petitioner's position that section 2039(a), upon which the Government relies in the first instance for inclusion of the $25,000 payment in the gross estate, does not require that result by its very terms, and second, that the payment is exempt from such inclusion by reason of section 2039(c) which is not rendered inapplicable by the exception to such exemption provided in section 2039(f). We deal separately with each of the statutory arguments and consider finally the constitutional point. 1
We note preliminarily that petitioner complains with indignation — an indignation that we fully share...
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