Ross v. Odom

• Decision Date: 16 September 1968
• Docket Number: No. 24484.,24484.
• Citation: 401 F.2d 464
• Parties: A. C. ROSS, District Director of Internal Revenue, Atlanta, Georgia, Appellant, v. Suzanne ODOM, Individually and as Executrix of the Estate of Benton Odom, Deceased, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

401 F.2d 464 (1968)

A. C. ROSS, District Director of Internal Revenue, Atlanta, Georgia, Appellant, v. Suzanne ODOM, Individually and as Executrix of the Estate of Benton Odom, Deceased, Appellee.

No. 24484.

United States Court of Appeals Fifth Circuit.

September 16, 1968.

Mitchell Rogovin, Asst. Atty. Gen., Richard C. Pugh, Acting Asst. Atty. Gen., Lee A. Jackson, David O. Walter, Anthony Z. Roisman, Attys., Dept. of Justice, Washington, D. C., for appellant, Charles L. Goodson, U. S. Atty., Slaton Clemmons, Asst. U. S. Atty., of counsel.

William L. Kinzer, B. D. Murphy, Atlanta, Ga., for appellee, Powell, Goldstein, Frazer & Murphy, Atlanta, Ga., of counsel.

Before BROWN, Chief Judge, and FAHY^* and DYER, Circuit Judges.

JOHN R. BROWN, Chief Judge:

When is a no contract a contract? That is the question. That, as is so frequent, this arises under the income tax structure is hardly any surprise. In more austere terms the question is whether the District Court was correct in holding that $27,450 received by Taxpayer as beneficiary of her husband's participation in the state-established Georgia Survivors' Benefit Program constituted proceeds of "a life insurance contract" under 26 U.S.C.A. § 101(a) (1) and were thus wholly tax exempt.¹ The Government, seeking reversal, contends that the proceeds were only a partially exempt employer-provided employee death benefit under 26 U.S.C.A. § 101(b) (1).² We affirm.

The facts are not complicated as tax cases go, were stipulated for the most part, and may be briefly stated. Robert Benton Odom died testate in 1961. His widow Suzanne is the duly authorized executrix of his estate and is the Taxpayer here. Robert had been employed by the State of Georgia since 1934 until his death. In 1953 the State of Georgia, by an amendment becoming an integral part of its intricate statutory structure for an annuity-pension program,³ enacted a survivors' benefit program to provide for the payment of death benefits to beneficiaries designated by participants in the program. See Ga.Code Ann. § 40-2523.⁴ In accordance with Rules and Regulations promulgated by the Board of Trustees of the Employees Retirement System of Georgia, §§ 40-2501(1) (2); 2506(1) (2); 2523(5), Robert qualified for the program and participated therein. Under it the State deducted ½ of 1% of his monthly pay as his contribution toward the program which it paid into the Survivors' Benefit Fund. § 40-2523(2). An equal amount, upon which Robert paid no income tax, was paid into this fund by the State of Georgia. At the time of his death, Robert's contributions totaled $662.33 with an equal sum paid by the State. Under the statutory structure survivor death benefits were to be paid out of this fund. The amounts payable to beneficiaries under the system were not funded or reinsured by any independent insurance company. Operation of the program bore, however, many similarities to insurance. The Board of Trustees under § 40-2523(1) was required to use an actuary in promulgating (and periodically reviewing) tables, rates, regulations, etc., as set forth in § 40-2509(2). And in 1959, after six years' experience with the program, the benefits payable to beneficiaries were increased because of the demonstrated success of the program and the adequacy of the actuarial computations.

Taxpayer does not contend that the benefits she received were a gift, but she did not report the survivors' benefit as income for 1961 since she contends that the payments constituted exempt proceeds under "a life insurance contract." The Internal Revenue Service determined that the proceeds were taxable as a non-life insurance employer-provided death benefit to the extent they exceeded $5,000 under § 101(b).⁵

This case is one of first impression⁶ and the precedents as to what constitutes "amounts received under an insurance contract * * * paid by reason of the death of the insured" are meager. Mertens, Federal Income Taxation § 7.03 (1962). But all cases which have had to discuss the problem are in agreement that for a monetary benefit paid to survivors to come within the purview of § 101(a) (1), the "insurance agreement need not be in the form of the standard life insurance contract." Mary Tighe, 1959, 33 T.C. 557, 564.⁷ And, as the cases reflect, the arrangement need not even be in the form of a traditional bilateral agreement, or for that matter, even a unilateral one signed by one party and accepted by the other. Instead, for tax purposes the critical factors in determining when the payment of death benefits constitutes insurance have historically been the presence in a binding arrangement of risk-shifting and risk distribution. Helvering v. Le Gierse, 1941, 312 U.S. 531, 539, 61 S.Ct. 646, 85 L.Ed. 966, 999. This involves the payment of premiums or assessments by a number of individuals into a common fund out of which the payor's estate or beneficiaries will be paid a certain amount upon his death regardless of whether the amount is more or less than the decedent has paid into the fund." Mary Tighe, supra, 33 T.C. at 564.

The concept of risk-shifting and risk-distribution was further explained in Commissioner of Internal Revenue v. Treganowan, supra, 183 F.2d at 291: "`Risk shifting emphasizes the individual aspect of insurance: the effecting of a contract between the insurer and the insured each of whom gamble on the time the latter will die. Risk distribution, on the other hand, emphasizes the broader, social aspect of insurance as a method of dispelling the danger of the potential loss by spreading its cost throughout the group. * * *' Note, The New York Stock Exchange Gratuity Fund: Insurance That Isn't Insurance, 59 Yale L.J. 780, 784."

In light of these general principles that have been developed over the years in considering life insurance both under the present § 101 and its predecessor⁸ and the estate tax provisions relating to insurance,⁹ we fully approve the Trial Court's holding that the $27,450 received by taxpayer from the Georgia Survivors' Benefit Program constituted amounts received under a life insurance contract.

It is undisputed that Taypayer's deceased husband paid only $662.33 into the fund (equally matched by the State of Georgia) until the date of his death. At that same time, approximately 20,000 other employees of the State of Georgia were also contributing an identical percentage of their monthly paycheck into the one common Survivors' Benefit fund out of which the prescribed benefits would be paid. Thus the risk-shifting requirement of an insurance arrangement was satisfied because the employee to the extent of the prescribed benefits had effectively shifted the economic risk that could arise from his untimely death from his survivors to the fund. Likewise, by the limited contributions made by him he in effect shifted to the fund the net proceeds of the benefits receivable which, for like family security, he would have had to accumulate by non-expended savings.¹⁰

Additionally, the plan into which Taxpayer's husband paid his monthly contribution met the risk distribution requirement historically imposed on any plan that aspired to be labeled life insurance. Over 20,000 persons employed by the State of Georgia were contributing to the single survivors' benefit fund each month, as was the State itself. Thus if the amount of contributions was actuarially adequate to pay the benefits of all participants, the risk of loss that was shifted to the fund was in turn distributed to a large number of persons. As the contributions were fixed at a statutory maximum of ½ of 1% of the employees' pay, § 40-2523(4) (a), and a like ceiling on that of the state, § 40-2523(4) (c), the unknown for computation were the benefits prescribed. As required by the statute, §§ 40-2509; 40-2523(1), these were fixed on accepted actuarial computations. And the testimony of an acknowledged actuarial expert associated with the actuarial consultants retained by the Board of Trustees under compulsion of the statute, § 40-2509(1), was uncontradicted that on accepted actuarial principles, the size and composition of the group, and relevant expectancy and investment factors, the benefits prescribed could be discharged by the Survivors' Benefit Fund. There was thus no if. On both scores this was insurance.

The Government makes a number of arguments in the hopes of overcoming, probably more accurately, of escaping from this undeniable risk shifting and risk distribution. Underlying all is a persistent theme that there must be a traditional "contract," a contract for insurance, and therefore necessarily executed by one qualified to write insurance as such. What that is, of course, is an insistence that in form there is nothing here resembling an insurance policy (contract). But form is ordinarily not controlling as the Government well knows from the success with which its appeals to substance over form meet. This case becomes a sharp reminder of the soundness of Judge Wisdom's declarations for us: "The principle of looking through form to substance is no schoolboy's rule; it is the corner stone of sound taxation * * * for `Tax law deals in economic realities, not legal abstractions * * *.' Commissioner of Internal Revenue v. Southwest Exploration Co., 1956, 350 U.S. 308, 315, 76 S.Ct. 395, 399, 100 L.Ed. 347." But he went on to warn that "resort to substance is not a right reserved for the Commissioner's exclusive benefit to use or not to use — depending on the amount of the tax to be realized. The taxpayer too has a right to assert the priority of substance * * *." Weinert's Estate v. Commissioner of Internal Revenue, 5 Cir., 1961, 294 F.2d 750, 755.

One such argument is that the form is fatally deficient since there can be no true risk distribution unless the employees of the State, the insureds, pay the full amount of premiums necessary for the fund to meet obligations that it will incur. This argument is neither good economics nor good...