*746 Petitioner assigned to a trust established by him all of the retirement pay, or pension, receivable by him in the future from an annuity system established by his employer to carry out a plan of retiring allowances to its employees for their long and faithful services. Held, that the amount of a pension received by petitioner's assignee in the taxable year under the assignment is not to be included in petitioner's income for that year.
*1145 The respondent determined a deficiency in income tax against the petitioner for the calendar year 1934 in the amount of $1,018.42, of which amount $977.36 is in controversy. It is alleged in the petition that the respondent erred in including in petitioner's income an amount of $6,000 representing retirement pay, or a pension, from the Peoples Gas Light & Coke Co.
The case was submitted on a written stipulation of facts and exhibits attached thereto. Only such facts as are deemed necessary for consideration of the issue presented are set out herein.
FINDINGS OF FACT.
Petitioner is an individual, *747 residing at Santa Barbara, California. He was formerly president of the Peoples Gas Light & Coke Co., of Chicago, Illinois, hereinafter called the company, an Illinois corporation.
On May 8, 1912, the board of directors of the company, by written instrument, established a "Service Annuity System" for the benefit of employees, and in the same instrument prescribed certain rules, *1146 methods, and procedure for maintaining and conducting the same. The service annuity system, hereinafter referred to as the annuity system, was created by the company, as shown by the instrument, "to systematize the administration of, its existing scheme fo retiring allowances for long and faithful service" of the employees.
Under the instrument establishing the annuity system there was created a "Department" to be known as the "Service Annuity Board", consisting of five members, all of whom were either active officials or employees of the company. The president of the company was a member and ex officio, chairman of the board, and the secretary of the company was a member and ex officio, secretary of the board. The board had the power to determine, within the provisions of the rules prescribed*748 for the annuity system, the eligibility of all persons in the service of the company for retirement and a service annuity. It also had the control of the management and administration of the annuity system and of the moneys or other income accruing to the department and the investment, reinvestment, and disbursement of the same. The action of the board in any matter within its jurisdiction was final and conclusive unless vetoed by the president or the board of directors of the company.
Under the instrument establishing the annuity system any employee, including officers, who had been in the service of the company for a specified number of years should, upon his request, if approved by the service annuity board, be retired from active duty and become eligible to receive an annuity, the amount thereof to be determined according to the length of his service and based for each year of service upon "an allowance amounting to two per cent (2%) of the average regular monthly pay received by such employee during the five years immediately preceding retirement; provided, however, the minimum allowance shall be $25 per month."
Article IV of the instrument provided, in part, as follows:
*749 1. All unexpended parts of contributions heretofore made by the Company to the maintenance and operation of retiring allowances shall be placed to the Credit of the Departmant, and be subject to the control of the Service Annuity Board in conducting the affairs and operations of the Department. In addition thereto the sum of $150,000 is hereby contributed to said Department; and also, in addition thereto, the Company will, in each calendar year after the year 1912, make a further contribution to said Department of $150,000, any unexpended balances in any and each year to remain in the fund. The Service Annuity Board shall keep invested the annual unexpended amounts of said annual contribution of $150,000, and may use the income arising therefrom in defraying the ordinary charges of the Department, including allowances to annuitants, or may reinvest the unexpended part of such income, it being the intention of the Board of Directors of the Company that all such unexpended parts of the annual contribution by the Company to the Department, and income arising thereon, shall, until the further order of the Board of Directors, be kept invested and reinvested, with the view and purpose*750 to create a *1147 reserve fund which shall be available to defray the requirements of service annuity allowances made to its employes. * * * When retiring allowances shall be authorized pursuant to order of the Service Annuity Board the same shall thereafter be paid monthly during the life of the annuitant; * * * Whenever it shall be ascertained that the basis of retiring allowances herein specified creates demands in excess of the provisions herein made for retiring or service annuity allowances, and as often as such condition may arise, a new basis ratably reducing the said retiring allowances, applicable alike to existing and after enrolled annuitants, may be established to bring the expenditures within the limit of the provisions so herein made, and the decision of the Service Annuity Board in establishing such new basis shall be absolutely conclusive. * * *
2. A pay-roll, to be designated "Service Annuity Roll," containing the names of those to whom allowances are made, and the amount of such allowances, severally, shall be prepared at the close of each month by the general bookkeeping department; the monthly roll thus prepared shall be sent to the Service Annuity*751 Board for certification by the Secretary, or the Chairman, and one other member of the Board, and upon such certification, the allowances due to the annuitants severally entitled thereto shall be paid out of the funds of the Department through the usual channels of payment.
After his retirement on October 1, 1913, petitioner was duly placed on the "Service Annuity Roll" established under the service annuity plan and became entitled to a pension of $6,000 per year during his lifetime.
On January 1, 1920, petitioner, the company, and the trustees of the "George O. Knapp Benevolent Fund," hereinafter referred to as the benevolent fund, made and entered into an agreement creating that fund, which agreement set forth the uses and purposes of the fund. This agreement recited, among other things:
ARTICLE I.
Said George O. Knapp hereby assigns and transfers to the trustees, and hereby irrevocably authorizes and directs the Company to pay over to the Trustees, all of said annual pension or annuity receivable by him from the Company, from and after the date hereof, for and during the remaining term of his matural life, for the uses and purposes and upon the trusts hereinafter set*752 forth (subject, however, to all the terms, conditions and rules of said Pension or Service Annuity System of the Company).
ARTICLE II.
* * *
Section I. The Trustees shall receive from the Company all of said pension or annuity, and the moneys so received by the Trustees shall be known as the "George O. Knapp Benevolent Fund" * * * said Fund to be held, invested, reinvested, and disposed of by the Trustees as hereinafter set forth.
* * *
Section 4. The Trustees shall from time to time, as they may see fit, expend or pay out all of the Fund then accumulated, or any part thereof, for the relief, welfare, education and/or betterment of needy and deserving former, *1148 present or future employees (or their families) of the Company, or of any gas company which had been or may hereafter be consolidated with or merged into the Company, or of any other gas company the plant and property of which has been or may hereafter be leased to or otherwise acquired or operated by the Company.
ARTICLE III.
The Company hereby consents to the establishment of said Fund, and covenants and agrees that the Trustees shall be paid all of the pension or annuity to which said George*753 O. Knapp may be entitiled from time to time under said Pension or Service Annuity System, from and after the date hereof, for the uses and purposes herein set forth.
On December 31, 1929, the company entered into a certain written agreement and declaration of trust with the trustees thereunder, creating and establishing a certain trust, designated therein as "The Peoples Gas Light and Coke Company Service Annuity Trust", hereinafter called the annuity trust, under the provisions of which certain moneys and securities, having a value of $1,992,614.24, were assigned, transferred, and delivered to the trustees with power to them to manage, invest, and reinvest same, for the sole purpose specified therein, of paying service annuities theretofore or thereafter granted to employees of the company under the provisions of the company's annuity system or under any new or modified pension system, or systems, which the company might adopt and have in force at any time thereafter during the term of the annuity trust. Those annuities were to be paid at times and in such amounts as fixed by the "Service Annuity Board" or board of directors of the company. The trust agreement recited, inter*754 alia:
WHEREAS, the Company for many years has maintained a Service Annuity System for the benefit of its employes reaching the required age and having the required period of service, and with a view of giveing to such employes better assurance as to the payment of service annuity allowances aganted or to be granted, the Company has determined to create a Service Annuity Trust for the exclusive benefit of such employes.
Section 16 of the trust agreement provided, among other things, that:
The Company shall have the right at any time to change, modify or discontinue its Service Annuity System at the time existing, * * * and in so doing may change or modify the terms of this trust for the purpose of carrying out any such change or modification, provided that:
(a) * * * no annuity granted prior to such change or modification shall be reduced in annual amount and the service annuity fund existing at the time of such change or modification shall be and remain available for the payment of service annuities under such change or modified system.
Section 16 also provided that if the company should elect to disallowance allowance is granted for the purpose of allowing a return*755 of capital, *1149 enactment of legislation providing for a pension system, the trustees of the annuity trust should cause a determination to be made actuarially of the amount required to pay the annuities theretofore granted and the service annuity fund then in the hands of the trustees should be applied or distributed as follows:
(1) If the service annuity fund shall be less than the amount actuarially determined to be necessary for the payment of such annuities theretofore granted * * * each annuity shall be reduced pro-rata in accordance with such plan as the Trustees shall adopt, and the Trustees shall apply said service annuity fund toward the payment of such annuities at the reduced rate, as such annuity fund shall become payable;
(2) If the service annuity fund shall be equal to or in excess of the amount actuarially determined to be necessary to provide for the payment in full of such annuities theretofore granted * * * all or a portion of such fund determined to be sufficient to provide for the full payment of all such annuities shall be set aside and held and applied by the Trustees from time to time to the payment of such annuities as they shall become payable, *756 or to the purchase of annuities for the annuitants entitled to receive such annuities, and any remainder of the service annuity fund not so set aside shall be paid over and returned to the Company.
An actuarial calculation, based on the American Experience Table of Mortality and with interest earnings at a rate of 4 percent per annum, which actuarial calculation was made in 1929 at the request of the company by an insurance actuary, shawed that an amount of $2,033,532 was required as of December 31, 1929, when the amount of $1,992,614.24 was paid by the company into the trust fund, to pay in full all pensions or annuities to each and every person, for and during the remaining life of such person, on the service annuity roll established by and under the annuity system of the company. The amount of $1,992,614.24 is approximately 98 percent of said amount of $2,033,532.
From time to time during the period beginning January 1, 1930, and ending December 31, 1937, inclusive, various amounts totaling $3,790,000 were transferred by the company to the trustees under the annuity trust, to be held and used by said trustees under and pursuant to the terms, provisions, and conditions of*757 said trust as additions to and supplementing the moneys and securities transferred to the said trustees on December 31, 1929.
These additional amounts were transferred as follows:
| 1930 | $425,000 |
| 1931 | 300,000 |
| 1932 | 465,000 |
| 1933 | 520,000 |
| 1934 | $520,000 |
| 1935 | 520,000 |
| 1936 | 520,000 |
| 1937 | 520,000 |
During the period beginning January 1, 1930, and ending December 31, 1937, inclusive, the total amounts paid under and pursuant to *1150 said annuity trust were $3,377,776.82, which amounts were paid as follows:
| 1930 | $267,385.10 |
| 1931 | 296,016.83 |
| 1932 | 366,404.85 |
| 1933 | 456,268.09 |
| 1934 | 469,063.41 |
| 1935 | $478,460.51 |
| 1936 | 503,336.20 |
| 1937 | 504,841.83 |
| Total | $3,377,776.82 |
The amount of the deficiency in controversy is based upon the inclusion by the Commissioner of the amount of $6,000 in petitioner's taxable income for 1934, representing certain payments received during the taxable year by the trustees of the benevolent fund under the company's annuity trust and pursuant to the terms and conditions of the agreement under which that fund was established. This $6,000 was included in the total amount of $3,377,776.82 paid pursuant to the*758 annuity trust, as set out in the immediately foregoing tabulation.
OPINION.
TYSON: This case involves the amount of $6,000 distributed under a retirement pay or pension trust, which amount had been previously assigned by petitioner, as shown in our findings of fact, to the benevolent fund. The only question presented is whether this amount so distributed by the service annuity trust is taxable to petitioner, the assignor. The applicable statute is set out in the margin. 1
Petitioner contends that, having irrevocably assigned to the trustees of the benevolent fund all of the annual pension receivable by him during his lifetime in the future for services performed in the past, he has transferred all of his right in the retirement pay, *759 or pension, that such right is a property right, that the income receivable therefrom was not conditioned upon the performance of any further services by the petitioner, and that he is not taxable upon the amount paid to his assignee. He further contends that, since the payments in 1934 were from the income or corpus of a trust, his assignment effected the transfer therefore of his beneficial interest in the trust, and that the income therefrom paid to his assignee is not taxable to him.
The respondent contends that the retirement pay, or pension, which petitioner was entitled to receive as a retired employee of the *1151 company was taxable to him under section 165 of the Revenue Act of 1934 2 and, if not, that it was nevertheless taxable to him as earned income within the meaning of the applicable statute, regardless of the fact that it was irrevocably assigned by petitioner to a benevolent trust for the uses and purposes of the trust.
*760 No contention is made by respondent that the amount here involved should be included in the income of petitioner because of the application of either section 166 or 167 of the Revenue Act of 1934 to the trust by which petitioner created the benevolent fund.
There is no question raised as to the validity of the assignment or its enforceability as between the parties. So, regarding the assignment as valid between the parties, the question remains whether the assignor is taxable on the amount paid the assignee.
Under the service annuity system of the company, the retirement pay, or pension, to a retired employee was based on services theretofore performed and varied in amount according to the length of service of the employee and the salary paid him during the last five years of his employment. Such retirement pay, or pension, is to be regarded as additional compensation for past services within the meaning of the applicable statute. Cf. ; ; *761 ; certiorari denied, 273 U.s. 754; , affirming ; ; , affirmed per curiam,; .
The question of whether compensation for personal services can be so assigned as to relieve the "earner" from income tax thereon has often been before this Board and the courts, and the decisions are not all in harmony and are somewhat difficult of classification. It is, however, settled that income to be earned in the future as compensation for personal services can not be assigned by an anticipatory agreement so as to relieve the assignor of the tax, , and that a member of a partnership can not assign future earnings to a nonpartner and thereby escape the tax. . But where the income assigned is to be received as compensation for services rendered entirely in the past*762 by the assignor and the right to receive it has become fixed and determined *1152 in him before assignment, it has been generally held that the assignor is relieved from tax thereon because his assignment is that of a property interest. ; certiorari denied, ; , affirming ; cf. ; certiorari denied, ; ; ; ; ; and .
By the instrument of May 8, 1912, the company established a fund to be used solely for the payment of retirement benefits, or pensions, to its retired employees for their long and faithful services. After his retirement on October 1, 1913, petitioner was duly placed on the service annuity roll and thereby became entitled to an annual retirement pay, or pension, during*763 his lifetime to be paid from the fund and later additions made thereto, including those made under the instrument of December 31, 1929, by which the Peoples Gas Light & Coke Co. service annuity trust was created by the company for the purpose of giving employees "better assurance as to the payment of service annuity allowances granted, or to be granted." Petitioner's right to receive the pension during his lifetime thus became fixed and definite and constituted such a property right as was subject to the assignment he made to the benevolent fund.
Accordingly, under the authorities last above cited, we are of the opinion that the irrevocable assignment of January 21, 1920, by petitioner to the trustees of the benevolent fund of all the retirement pay, or pension, which would have otherwise been thereafter receivable by him from the company constituted an assignment of a property interest which had become fixed and determined in petitioner prior to the time the assignment was made and that the retirement pay, or pension, here involved and received by petitioner's assignee was in no degree dependent upon continued activity of the petitioner to produce it. See *764 ; ; ; ; and ;.
The decision in , is not controlling here, for the facts there involved are clearly distinguishable from the facts in the instant case. There, the taxpayer assigned merely a contingent right to receive presently unmatured, unascertainable renewal commissions which the insurance company would not become obligated to pay until the policyholders had made future premium payments, none of which might ever be made, and, further, *1153 the insurance company retained the right to offset against renewal commissions as they became payable any then existing debt of the assignor to the company. There, the subject matter of the assignment was a chose in action the rights under which were entirely contingent upon the happening of uncertain future events in the respects mentioned. In the instant*765 case, the taxpayer assigned a presently existing absolute right to pension payments from a fund created for that sole purpose and neither the assignor's right nor the obligation of the trustees of that fund to pay such pension was contingent upon the happening of any future events.
Having held, as we have, that the assignment of the petitioner to the trustees of the benevolent fund was that of a property interest, it follows that, as further contended by petitioner, it was also an assignment of his beneficial interest in the trust created by the company and thus comes within the rule announced in the following cases: ; ; and .
We think that the contention of respondent that section 165 of the Revenue Act of 1934 applies here is not sound. As we view that section, it was the intention of Congress to thereby tax to the distributee of a pension fund the amount actually distributed or made available to him during the taxable year. Here, petitioner, after the assignment of his right to retirement pay, or pension, was no longer entitled*766 to any distribution and no amount was actually distributed or made available to him during the taxable year. The amount of the retirement pay, or pension, here involved was actually available only to petitioner's assignee, the trustees of the benevolent fund, who had the legal right to it and to whom it was actually distributed.
We conclude that the respondent erred in including in petitioner's income the amount of $6,000 here involved.
Reviewed by the Board.
Decision will be entered under Rule 50.
DISNEY dissents.
HARRON, dissenting: The income in question, paid from an employees' trust fund which was contributed wholly by an employer, is retirement pay, and is additional compensation for personal services actually rendered. A pension payment is a form of compensation for personal services, and it is not different from salary or wages, as a type of income. The issue involves taxation of a particular type of income, namely, earned income, or compensation for personal services. The question is, whether the pension payment for 1934 is taxable to petitioner, despite his prior assignment thereof, under the provisions of either or all of the following*767 sections: section 22*1154 (a), defining gross income; section 25(a)(5), defining earned income; or section 165.
The majority opinion says, in effect, that the rule of , does not apply to this case. However, it is submitted that the doctrine of the Earl case is that, because of the special quality of earned income, it must vest in the earner, for purposes of income tax, and the earner may not prevent the vesting of earnings in him by assignment thereof in anticipation of the payment of the earned compensation. It is believed that the Supreme Court has categorically stated the rule to be that Congress has the right to and intended to tax earned income to the earner, and that the earner may not escape taxation upon earned income. Such appears to be the meaning of the following statement in the Earl case:
There is no doubt that the statute could tax salaries to those who earned them and provide that the tax could not be escaped by anticipatory arrangements and contracts however skillfully devised to prevent the salary when paid from vesting even for a second in the man who earned it. [Italics supplied.]
*768 The words "when paid" seem to make it clear that the time relation of the effort to prevent the vesting of earned income in the earner and the rendering of services for compensation is not material; i.e., it is immaterial whether, at the date of assignment of future compensation, the earner-assignor has or has not completed the rendering of his personal services. It is in the nature of compensation for personal services, that the compensation is earned by the work of the individual, and is payable to the worker. He may not, by his agility, escape taxation on compensation by executing an assignment at any time. That appears to be the absolute rule. If it is not the rule, every worker can escape taxation on compensation for personal services by the adroitness of assigning compensation before it is paid, as soon as he completes his work. The Supreme Court appears to have placed, already, a bar to the above procedure, by stating that the earner of income can not prevent compensation from vesting in him "when paid." The test is not whether earned income is "beneficially received." The earner may elect to never receive the compensation, but when it is paid, it vests in him for the*769 purposes of Federal income tax. If the foregoing is a correct statement of the meaning of the rule in the Earl case, it is applicable here, and petitioner is taxable on the pension paid in 1934 to his assignee.
Congress has clearly indicated that pension payments are to be taxed under the same rule as other earned income by enacting section 165, and that the amount of a pension payment is taxable to the earner when it is "made available" to him. Petitioner retired from the employ of the company in 1913. Thereafter, his name appeared on the company's "Service Annuity Roll" and he was entitled to *1155 receive pension annually for life. Presumably petitioner received, personally, pension payments from 1913 up to the date of the assignment in 1920 to the Knapp benevolent fund. Congress enacted for the first time the provision applying to employees' pensions in the Revenue Act of 1921. See section 219(f) of the Revenue Acts of 1921, 1924, and 1926 and section 165 of the Revenue Acts of 1928, 1932, and 1934. Under these sections of the various acts petitioner was taxable on pension payments distributed or made available to him. After the assignment in 1920, the pension*770 payments were "made available" to petitioner when they became payable. Only the names of former employees could appear on the company's "Service Annuity Roll." The name of the Knapp benevolent fund could not appear on that roll as an employee, and it could receive payment of the pension under the assignment only through petitioner, because of his existence and his status as a former employee. When pension became payable it was "made available" to petitioner because of the services he had rendered and because he lived. The pension was none the less "available" to petitioner even though he elected to have it paid to his assignee. Section 165 is applicable. The 1934 payment is taxable to petitioner under that section and under the rule of , because the pension vested in petitioner when it was paid, despite his prior assignment thereof.
Congress has allowed deduction from gross income for gifts made to certain charitable uses under section 23(o)(5). But the amount of the deduction is limited to 15 percent of the taxpayer's net income as computed without the benefit of the subsection. Petitioner's assignment of his pension pay was a gift*771 or contribution to the Knapp benevolent fund. The result reached by the majority opinion in this case would defeat and make meaningless the limitation imposed on the amount of the deduction under section 23(o)(5) where the amount involved is more than 15 percent of net income. Also, Congress has allowed an exemption from income tax of 10 percent of earned income under section 25(a)(4), providing an earned income credit. The limitation imposed on the amount of the credit would be defeated, under the majority view, where income of the type involved in this case amounted to more than 10 percent of total earned income.
The case of , is distinguishable from this case. The income assigned there was royalties, a type of income clearly different from compensation for personal services and not within the rule of the Earl case.
For the reasons stated, I respectfully dissent from the majority opinion.
STERNHAGEN and OPPER agree with this dissent.
Footnotes
1. Revenue Act of 1934. -
SEC. 22. GROSS INCOME.
(a) GENERAL DEFINITION. - "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; * * * ↩
2. SEC. 165. EMPLOYEES' TRUSTS.
A trust created by an employer as a part of a stock bonus, pension, or profit-sharing plan for the exclusive benefit of some or all of his employees, to which contributions are made by such employer, or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, shall not be taxable under section 161, but the amount actually distributed or made available to any distributee shall be taxable to him in the year in which so distributed or made available to the extent that it exceeds the amounts paid in by him. * * * ↩