Eberly v. Comm'r

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.

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*125 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 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*126 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 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, *127 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*128 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 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.

*129 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 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

*130 On decedent's Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, the personal representative included the remaining balance of decedent's TIAACREF 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 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*131 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 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*132 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).

Section 691 concerns the taxation of income in respect of a decedent*133 (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: