Smith v. United States
| Decision Date | 11 May 1972 |
| Docket Number | No. 71-1331.,71-1331. |
| Citation | 460 F.2d 1005 |
| Parties | Patty R. SMITH et al., Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Sixth Circuit |
H. Stennis Little, Jr., Nashville, Tenn., for plaintiffs-appellants.
Daniel B. Rosenbaum, Tax Division, Department of Justice, Washington, D.C., Fred B. Ugast, Acting Asst. Atty. Gen., Meyer Rothwacks, Ernest J. Brown, Attys., Tax Division, Department of Justice, Washington, D.C., on brief; Charles H. Anderson, U.S. Atty., Nashville, Tenn., of counsel, for defendant-appellee.
Before CELEBREZZE, McCREE, and MILLER, Circuit Judges.
Appellants are taxpayers who appeal from a judgment of the District Court upholding the Commissioner's determination that lump-sum payments to each of them of their respective interests in their employer's profit-sharing plan were taxable as ordinary income. The plan was funded by contributions to a trust which was tax-exempt under the provisions of the Internal Revenue Code of 1939 and under section 501(a) of the Internal Revenue Code of 1954, 26 U.S.C. § 501(a).1 It was adopted by appellants' employer, Adkins Cargo Express, Inc. (Cargo), when that company acquired and liquidated appellants' former employer in 1964.
The distributions which are the subject of this appeal followed the purchase of all of Cargo's stock by Gateway Transportation Company, Inc. (Gateway), on June 30, 1965. On July 14, 1965, Cargo's new board of directors, which had been elected by Gateway, resolved to discontinue and terminate the plan and trust. On December 29, 1965, the plan's trustee issued a check to each entitled participant in the plan in full settlement of his interest.
For tax and business reasons unrelated to the issues in this appeal, Cargo was maintained as a wholly owned subsidiary of Gateway until July 17, 1968, when it was merged into Gateway pursuant to a September 14, 1967, resolution of the corporations' boards of directors. Appellants Patty R. Smith and Mildred P. Chastain remained as employees of Cargo after the stock acquisition by Gateway and the distribution of the trust fund, but the employment of appellant John H. Kaiser was terminated on September 30, 1965, as a result of a decision to move the company's accounting operation from Nashville, Tennessee, to La Crosse, Wisconsin.2 Taxpayers reported the amounts they received in distribution as capital gains, but the Commissioner, contending they had received ordinary income, made deficiency assessments. Thereafter, taxpayers paid the income tax and, after their claims were disallowed, brought this action to recover taxes aggregating $5,718.62. They assert that they were entitled by section 402(a)(2) of the Internal Revenue Code of 1954, 26 U.S.C. § 402(a)(2),3 to treat the distributions, in excess of amounts which they as employees contributed, as gains from the sale or exchange of capital assets held for more than six months.4
The parties agree that to qualify for capital gains taxation under this section, a payment from a qualified trust must: (a) be the total distribution payable with respect to the employee; (b) be paid to the distributee within one taxable year of the distributee; and (c) be made on account of the employee's separation from the service. It is also agreed that the first two requirements have been met and that we need to determine only whether the distributions were made on account of the employees' separation from the service within the meaning of section 402(a) (2). We conclude that appellants were entitled to the benefit of capital gains treatment of the amounts received.
The decided cases and revenue rulings which discuss this issue have been accurately described as having a "bramble bush character."5 Accordingly, in applying them to the facts of this case it is helpful to review the history of capital gains provisions for this type of distribution.
The Internal Revenue Code of 1939, as enacted, made no provision for capital gains treatment of amounts paid from employee trusts. Employee participants in funded retirement plans were subject to a sudden "bunched-income" tax depletion of their retirement funds if they should receive a lump-sum distribution of their interest in a fund. In 1942, section 165(b) of the Code was amended to provide capital gains treatment of lump-sum payments made from employees' trusts on account of the distributees' "separation from the service."6 The report of the Senate Finance Committee merely stated that the provision was to be applied when "... the total distributions to which an employee is entitled are paid to the employee in the year in which he retires or severs his connection with his employer ...." S.Rep.No.1631, 77th Cong., 2d Sess. (1942), in 1942 C.B. 504, 607.
The first two Tax Court decisions which interpreted the statute did little more than reiterate that the payment must be made on account of the employee's separation from the service of his employer. In E. J. Glinske, 17 T.C. 562 (1951), the taxpayer's employer sold all its assets and discontinued business. The purchaser of the assets continued the taxpayer's employment, but three weeks after the purchase it discontinued the pension plan which had been maintained by the taxpayer's employer and distributed the funds from the trust. The court, denying capital gains treatment, stated that "`on account of the employee's separation from the service' means that the distributions were made on account of the employee's separation from the service of his employer." 17 T.C. at 565.7 In Estate of Fry, 19 T.C. 461 (1952), aff'd, 205 F.2d 517 (3d Cir.1953) (per curiam), the lump-sum payment was made to Fry when he reached retirement age, despite the fact that he continued to receive his regular compensation and continued to perform some services for his employer. The Tax Court concluded that the payment was not made on account of his separation from the service since he had not "severed his connection with his employer within the year in which he received the lump-sum settlement of his rights." 19 T.C. at 464.
Then in Mary Miller, 22 T.C. 293 (1954), aff'd, 226 F.2d 618 (6th Cir.1955) (per curiam), and in Lester B. Martin, 26 T.C. 100 (1956), the Tax Court held that a lump-sum distribution incident to the liquidation and dissolution of the taxpayer's corporate employer and the termination of its retirement fund qualified for capital gains treatment. The fact that the taxpayers in each case were employed by the successor company did not prevent the transaction from being a "separation from the service" of their former employers.
In Mary Miller, supra, the court considered a transfer of assets in exchange for stock of the successor company. The taxpayer's original employer, Strouss-Hirschberg Company, transferred all its assets to May Company for shares of May's outstanding stock. May continued the business and employed taxpayer and other Strouss-Hirschberg employees. Under the terms of the Strouss-Hirschberg trust agreement, its employees' rights to receive their respective shares of the trust became fixed on the day of the transfer of assets, when they became employees of May. The court stated:
In Lester B. Martin, supra, the Tax Court extended Mary Miller to a case in which there was no change of beneficial ownership incident to the corporate liquidation and plan termination which gave the taxpayer the right to receive payment. All the stock of Martin's original employer, Dellinger Manufacturing Company, was purchased by Sperry Corporation for cash. Six months thereafter, Sperry liquidated Dellinger and terminated the pension plan. The court concluded that the liquidation "resulted in a mass termination of the services of its employees ..." and that, "as in Mary Miller, the petitioner's rights arose on account of his separation from the service of his employer." 26 T.C. at 106. The court did not rely upon the transfer of beneficial ownership which had occurred when Sperry purchased all of Dellinger's stock.8
The Internal Revenue Code of 1954, which is applicable in this case, was enacted after the Tax Court's decision in Mary Miller, 22 T.C. 293 (1954), but before the decision of Lester B. Martin, 26 T.C. 100 (1956), and before the affirmance of Mary Miller by this court in Commissioner v. Miller, 226 F.2d 618 (1955). In section 402(a)(2) of the Code, Congress retained the provision of section 165(b) which granted capital gains treatment for lump-sum distributions from employees' trusts upon death or other separation from the service.9
To continue reading
Request your trial
-
Reinhardt v. Comm'r of Internal Revenue
...United States v. Johnson, 331 F.2d 943 (5th Cir. 1964); Gegax v. Commissioner, 73 T.C. 329, 334 (1979). Compare Smith v. United States, 460 F.2d 1005, 1014-1015 (6th Cir. 1972). While this Court has never considered a fact situation precisely like the present case, we have consistently foll......
-
Gegax v. Comm'r of Internal Revenue , Docket Nos. 109-77
...of employees. Gittens v. Commissioner, supra. Accord, United States v. Haggart, 410 F.2d 449 (8th Cir. 1969). Contra, Smith v. United States, 460 F.2d 1005 (6th Cir. 1972) (adopting the interpretation in Judge Tannenwald's concurring opinion in Gittens v. Commissioner, supra); Holstein v. U......
-
Francis C. v. Comm'r of Internal Revenue, s. 12970–90
...73 T.C. 329 (1979); Clarke v. Commissioner, 54 T.C. 1679 (1970); Gittens v. Commissioner, 49 T.C. 419 (1968); cf. Smith v. United States, 460 F.2d 1005 (6th Cir.1972). In United States v. Johnson, supra, Lee Co. purchased over 99 percent of the outstanding stock of Waterman Steamship Co. On......
-
Adler v. C.I.R., 95-2348
...retired or otherwise separated from service. See S.Rep. No. 1631, 77th Cong., 2d Sess. 138 (1942); see also Smith v. United States, 460 F.2d 1005, 1007 (6th Cir.1972); United States v. Johnson, 331 F.2d 943, 945 (5th Cir.1964). Moreover, Congress intended that such treatment be unavailable ......