T.C. Summary Opinion 2006-45
UNITED STATES TAX COURT
ANDREW J. EBERLY AND RUTHANNE E. EBERLY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6926-04S. Filed March 29, 2006.
Gary C. Randall and James J. Workland, for petitioners.
Catherine L. Campbell, for respondent.
CARLUZZO, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. Unless otherwise
indicated, subsequent section references are to the Internal
Revenue Code in effect for 2000. The decision to be entered is
not reviewable by any other court, and this opinion should not be
cited as authority.
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Respondent determined a $36,859 deficiency in petitioners’
2000 Federal income tax.
The issue for decision is whether a distribution
constructively received in 2000 by Andrew J. Eberly (petitioner)
from his father’s estate is includable in petitioners’ income for
that year as income in respect of a decedent within the meaning
of section 691(a).
Background
Some of the facts have been stipulated and are so found. At
the time the petition was filed, petitioners resided in Colbert,
Washington.
Petitioner’s father, William S. Eberly (decedent), was born
on November 9, 1925, and died on February 28, 2000. He was
survived by three sons, one of whom is petitioner. At the time
of his death, decedent was a participant in the Central
Washington University (CWU) Retirement Plan (the CWU retirement
plan), a qualified plan within the meaning of section 403(b)(1).
The CWU retirement plan provides, in relevant part, that the
minimum distributions from the plan must begin no later than
April 1 of the calendar year following the calendar year in which
the participant attains the age 70-1/2, or, if later, April 1
following the calendar year in which the participant retires from
CWU. Decedent retired from CWU on December 16, 1999. Given his
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age at the time, the minimum distributions under the CWU
retirement plan would have begun no later than April 1, 2000.
Teachers Insurance and Annuity Association and College
Retirement and Equities Fund (TIAA-CREF) are the fund sponsors of
the CWU retirement plan. TIAA-CREF provides, in general, various
annuity plan options for participants in the CWU retirement plan.
The TIAA-CREF annuity provisions state that a participant
“may during his lifetime, without the consent and to the
exclusion of any other person, receive, exercise, and enjoy every
benefit, option, right and privilege conferred” by the TIAA-CREF
annuity plan. After a participant’s termination of employment,
the TIAA-CREF annuity provides the participant with the option to
receive a lump-sum benefit from the participant’s accumulated
annuity funds. A request for a lump-sum distribution must be
made before the start of any annuity payments. Such a request
“cannot be revoked after the effective date” of the lump-sum
distribution request. The value of the accumulated annuity funds
for a lump-sum distribution is determined as of the end of the
business day on which TIAA-CREF receives the participant’s
request for a lump-sum distribution.
Under the TIAA-CREF annuity’s death benefits provision, if
the participant dies prior to the annuity starting date then
TIAA-CREF pays the participant’s accumulated annuity funds to the
participant’s named beneficiaries. The participant may designate
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or change the death benefits beneficiaries by giving written
notice to TIAA-CREF’s home office in New York City.
With respect to the procedures for elections and requests,
the TIAA-CREF annuity provides, in part, as follows:
An election or change may be made, in accordance
with the terms of your certificate, by written notice
satisfactory to [TIAA-CREF]. No such notice will take
effect unless it is received by [TIAA-CREF] at its home
office in New York, NY. Any notice of change in
Beneficiary or other person named to receive payments
will take effect as of the date it was signed, whether
or not the signer is living at the time we received it.
Any other notice will take effect as of the date it is
received. * * *
On February 21, 2000, prior to the annuity start date,
decedent executed a Request for a Retirement Annuity Withdrawal
(withdrawal request). The withdrawal request directed TIAA-CREF
to withdraw $600,000 from decedent’s accumulated annuity fund
balance and to deposit these funds into decedent’s designated
savings account. The withdrawal request was signed and dated by
decedent and mailed to TIAA-CREF’s home office in New York City
by priority mail. The withdrawal request was received at TIAA-
CREF’s home office on February 28, 2000, and, as provided by the
TIAA-CREF annuity, made effective as of that date.
On February 21, 2000, petitioner also executed a Designation
of Beneficiary, which was mailed to TIAA-CREF’s home office
by priority mail. The Designation of Beneficiary named
decedent’s three sons as beneficiaries, each entitled to a death
benefit equal to 25 percent of the annuity fund balance, with
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the remaining 25 percent to be equally divided among three
specifically identified charitable organizations. The
Designation of Beneficiary was received by TIAA-CREF on
February 29, 2000.
On February 28, 2000, TIAA-CREF was orally notified by CWU
of decedent’s death.1 Pursuant to the withdrawal request, on
March 3, 2000, TIAA-CREF electronically transferred $480,308 to
decedent’s bank account. This amount included interest for the
3 days from the date the withdrawal request was received until
March 3, less $120,000 of Federal income tax withholdings. For
the year 2000, TIAA-CREF issued to decedent a Form 1099-R,
Distributions From Pensions, Annuities, Retirement or Profit-
Sharing Plans, IRAs, Insurance Contracts, etc., that reported the
gross amount and taxable amount of the distribution to decedent,
as well as the Federal tax withheld by TIAA-CREF on the
distribution.
Decedent’s last will and testament provided that the
residuary of decedent’s estate was to be divided equally among
decedent’s three children. The amount distributed by TIAA-CREF
to decedent on March 3, 2000, was divided among decedent’s three
children by the personal representative of decedent’s estate. On
April 25, 2000, the personal representative issued three separate
1
As of that date, the balance of decedent’s TIAA-CREF
accumulated annuity fund was $953,996. This balance does not
take into account decedent’s $600,000 withdrawal request.
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checks each in the amount of $150,000 to Farmer’s New World Life
Insurance Company. Each $150,000 check was issued for an
individual retirement account (IRA) in the name of each of
decedent’s three children.
On decedent’s 2000 Form 1040, U.S. Individual Income Tax
Return, the personal representative reported the lump-sum
distribution from decedent’s TIAA-CREF accumulated annuity fund
as reported on the Form 1099-R. However, the personal
representative erroneously reported the taxable amount of the
distribution to be $149,949.2
On decedent’s Form 706, United States Estate (and
Generation-Skipping Transfer) Tax Return, the personal
representative included the remaining balance of decedent’s TIAA-
CREF accumulated annuity funds in decedent’s gross estate.3 On
Form 1041, U.S. Income Tax Return for Estates and Trusts,
decedent’s estate did not report any amount with respect to
2
This amount reflects the taxable amount of the
distribution reported on the Form 1099-R, Distributions From
Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,
Insurance Contracts, etc., less the $450,000 received by
decedent’s three children. The personal representative
erroneously determined that the $450,000 received by decedent’s
three children for the three IRAs was a tax-free “roll-over”
under sec. 403(b)(8).
3
After decedent’s death, TIAA-CREF computed the 25 percent
death benefits distribution to the charitable beneficiaries based
upon the balance in the annuity fund after the $600,000
distribution to decedent.
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decedent’s distribution from the TIAA-CREF accumulated annuity
funds.
Petitioners did not include the $150,000 distribution
petitioner constructively received from his father’s estate on
their timely filed, joint 2000 Federal income tax return.
In the notice of deficiency, respondent determined that the
$150,000 constructively received by petitioner is includable in
petitioners’ income as income in respect of a decedent under
section 691. Other adjustments made in the notice of deficiency
are computational and not in dispute.
Discussion
At the outset we note that petitioners now acknowledge the
errors made on decedent’s final Federal income tax return and
estate tax return. They distance themselves from those errors
and also retreat from their position taken earlier that, if
otherwise includable in their income, the $150,000 distribution
was subject to exclusion on account of the “roll over”.
Respondent does not suggest that any of these errors in any way
estop petitioners from their present position that the $150,000
distribution, constructive or otherwise, was an excludable
inheritance, see sec. 102(a), and not income in respect of a
decedent within the meaning of section 691(a). Furthermore,
nothing in the record suggests that there has been any
deviousness or mischief surrounding the dates reflected on the
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operative CWU retirement plan documents. Consequently, we turn
our attention to the controlling Federal and State law that
informs the manner in which we resolve the issue here in dispute.
Section 61(a) provides that gross income includes all income
from whatever source derived, including income from annuities and
“income in respect of a decedent”. Sec. 61(a)(9), (14).
Section 403(b)(1) generally provides that if an annuity
contract is purchased for an employee by certain tax-exempt
employers, or for an employee who performs services for an
educational organization by an employer as described in section
403(b), and if certain other requirements are met, then amounts
contributed by such employer for such annuity contracts shall be
excluded from the gross income of the employee for the taxable
year. Amounts distributed from employee annuity contracts under
section 403(b) are taxable to the distributee in the year in
which distributed under section 72. Sec. 403(b)(1).
Section 72(e) provides, in general, that if a distribution
is received prior to the annuity starting date, in a form other
than an annuity, such distribution shall be included in gross
income. Under the general rule, amounts received before the
annuity starting date are included in income to the extent such
amounts are allocable to income on the contract, and not included
in income to the extent such amounts are allocable to the
investment in the contract. Sec. 72(e)(2)(B).
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Section 691 concerns the taxation of income in respect of a
decedent (IRD). Section 691(a) provides in part:
(1) General rule.--The amount of all items of
gross income in respect of a decedent which are not
properly includible in respect of the taxable period
in which falls the date of his death or a prior period
* * * shall be included in the gross income, for the
taxable year when received, of:
(A) the estate of the decedent, if the right
to receive the amount is acquired by the
decedent’s estate from the decedent;
(B) the person who, by reason of the death of
the decedent, acquires the right to receive the
amount, if the right to receive the amount is not
acquired by the decedent’s estate from the decedent;
or
(C) the person who acquires from the decedent
the right to receive the amount by bequest,
devise, or inheritance, if the amount is received
after a distribution by the decedent’s estate of
such right.
Section 1.691(a)-1(b), Income Tax Regs., provides that
“income in respect of a decedent” refers to those amounts to
which a decedent was entitled as gross income but that were not
properly includable in computing taxable income for the taxable
year ending with the date of death or for a previous taxable year
under the method of accounting employed by the decedent. The
character of an item of IRD to the successor is the same
character as the item would have had in the decedent’s hands
“if the decedent had lived and received such amount.” Sec.
691(a)(3).
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The CWU retirement plan, which includes the TIAA-CREF
annuity, qualifies as a tax-deferred plan under section
403(b)(1). Accordingly, distributions under the CWU retirement
plan are taxable under section 72.
Respondent contends that the amount received by petitioner
was a death benefits distribution from the TIAA-CREF annuity and
IRD under section 691(a). According to respondent, the $150,000
distribution to petitioner is taxable under section 72 as if
decedent had received such amount. Petitioners and respondent,
of course, disagree on this point, but seem to agree that State
law controls the outcome. Respondent argues that TIAA-CREF
improperly and mistakenly gave effect to the withdrawal request
because decedent had died before the request was received.
Respondent’s argument is based upon the premise that the death of
petitioner’s father in some manner or another voided the
withdrawal request. The manner in which the relevant events
unfolded, however, demonstrates that respondent’s view is
somewhat unique. TIAA-CREF, the personal representative of
decedent’s estate, and the three charities named in the change of
beneficiary apparently do not share respondent’s view.4
4
We note that the three charities that were designated
beneficiaries under decedent’s TIAA-CREF annuity would have been
entitled to share a significantly larger death benefit
distribution under respondent’s position.
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Furthermore, we find no support for respondent’s position
under Washington State law. The Supreme Court of Washington has
held that “a pension granted to a public employee * * * is
contractual in nature.” Jacoby v. Grays Harbor Chair &
Manufacturing Co., 468 P.2d 666, 669 (Wash. 1970); see also
Caughey v. Employment Sec. Dept., 503 P.2d 460 (Wash. 1972);
Bakenhus v. Seattle, 296 P.2d 536 (Wash. 1956). In Boeing
Airplane Co. v. Firemen’s Fund Indem. Co., 268 P.2d 654, 658
(Wash. 1954), the court stated that “Where the terms of a
contract taken as a whole are plain and unambiguous, the meaning
of the contract is to be deduced from its language alone, and
it is unnecessary for a court to resort to any aids to
construction.” Furthermore, “Where contractual language is
unambiguous courts will not read ambiguity into the contract.”
Jacoby v. Grays Harbor Chair & Manufacturing Co., supra at 670.
The CWU retirement plan and TIAA-CREF annuity are contracts.
The TIAA-CREF annuity provides that decedent could “during his
lifetime * * * receive, exercise, and enjoy every benefit,
option, right and privilege conferred” by the TIAA-CREF annuity.
One such right conferred by the TIAA-CREF annuity is the
participant’s right to elect to receive a lump-sum distribution
from his accumulated annuity funds prior to the annuity start
date. With respect to exercising the right to a lump-sum
distribution, the TIAA-CREF annuity specifically provides that
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any such election must be made in writing and received by TIAA-
CREF at its home office. These terms are plain and unambiguous.
Prior to his death and the annuity start date, decedent
elected to receive a lump-sum distribution. In accordance with
the TIAA-CREF annuity’s requirements, decedent’s withdrawal
request was made in writing and mailed to TIAA-CREF’s home
office. The withdrawal request was received at TIAA-CREF’s home
office on the same date as decedent’s death. While TIAA-CREF was
notified of decedent’s death, decedent’s withdrawal request was
made effective by TIAA-CREF on the date received per the terms of
the TIAA-CREF annuity. The record is clear that TIAA-CREF
processed the distribution to decedent as a lump-sum
distribution. TIAA-CREF subsequently distributed the funds to
decedent. In accordance with the TIAA-CREF annuity’s provisions,
TIAA-CREF calculated and paid interest to decedent on the
$600,000 distribution for the time between the effective date of
the withdrawal request and the date the funds were electronically
transferred to decedent’s savings account. TIAA-CREF also
withheld Federal income tax on the funds distributed to decedent.
Finally, TIAA-CREF issued a Form 1099 to decedent which reported
the taxable amount of his lump-sum distribution.
The TIAA-CREF annuity provided decedent with the option of
electing to receive a lump-sum distribution. Decedent exercised
this option to receive a lump-sum distribution during his
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lifetime in accordance with the TIAA-CREF annuity’s requirements.
Upon receipt of the dated and signed withdrawal request from
decedent, TIAA-CREF’s obligation to distribute the funds became
absolute. See, e.g., Macartney v. Parmenter, 109 F. Supp. 493
(D.R.I. 1952); Pac. States Life Ins. Co. v. Bryce, 67 F.2d 710
(10th Cir. 1933). Receipt of decedent’s withdrawal request and
actual payment to decedent during his lifetime were not required
by the terms of the TIAA-CREF annuity.
The receipt by TIAA-CREF of the dated and signed withdrawal
request from decedent constituted an effective exercise by him of
his right to a lump-sum distribution during his lifetime. The
lump-sum distribution from TIAA-CREF was income to decedent and
properly includable in his 2000 gross income. Therefore, we hold
that the $150,000 received by petitioner was not a death benefits
payment and is not includable in petitioners’ gross income under
section 691(a) as IRD.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
for petitioners.