UNITED STATES TAX COURT
ESTATE OF MARTIN J. MACHAT, DECEASED, AVRIL GIACOBBI AND
ERIC R. SKLAR, EXECUTORS, Petitioner v
.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21573-96. Filed April 27, 1998.
Richard S. Kestenbaum and Bernard S. Mark , for petitioner.
Janet F. Appel and Donald A. Glassel , for respondent.
MEMORANDUM OPINION
LARO, Judge
: The Estate of Martin J. Machat (the estate)
petitioned the Court to redetermine respondent's determination of deficiencies in the amounts of $26,383 and $277,309 in its 1988 and 1989 Federal income tax, respectively, and additions thereto under section 6651(a) in the respective amounts of $6,596 and $69,327.
Following the estate's concession as to the 1988 and 1989 additions to tax, the remaining issue is whether the fund transfers from M.J. Machat Management Corp. Pension Plan and Trust (the Plan and Trust) to a temporary administrator were includable in the estate's gross income upon receipt by the temporary administrator. We hold they were. Unless otherwise stated, section references are to the Internal Revenue Code in effect for the years in issue. Rule references are to the Tax Court Rules of Practice and Procedure.
Background
This case was submitted fully stipulated under Rule 122. The stipulation of facts and the exhibits submitted therewith are incorporated herein by this reference. When the petition was filed, Avril Giacobbi (Ms. Giacobbi) resided in London, England, and Eric R. Sklar (Mr. Sklar) resided in Wantaugh, New York. Martin J. Machat (decedent) died of lung cancer on March 19, 1988, at the age of 67. Decedent's last will and testament (will), dated March 4, 1988, was propounded by Ms. Giacobbi, who was decedent's companion at the time of his death. After decedent's death, his estranged wife Roslyn Machat (Ms. Machat) brought suit to set aside a separation agreement entered into between Ms. Machat and decedent on July 3, 1984. Litigation was also brought by Ms. Machat and decedent's and Ms. Machat's children to deny probate of the will. Since probate of decedent's will was contested, on July 8, 1988, the New York County Surrogate's Court, pursuant to N.Y. Surr. Ct. Proc. Act section 902 (McKinney 1994), appointed Harvey E. Corn (Mr. Corn) to serve as the estate's temporary administrator.
Decedent's assets included a $1,082,292 interest in the Plan and Trust, which had been established by M.J. Machat Management Corp., effective August 28, 1978. The Plan and Trust was a qualified plan under section 401(a), and decedent was the sole participant and the sole trustee at all times before his death. The estate has not located a form designating a beneficiary of decedent's interest in the Plan and Trust, and thus decedent's interest therein is to pass under the terms of the Plan and Trust document. These terms are:
In the event a Participant fails to designate a
Beneficiary in writing, or the Beneficiary and the contingent Beneficiary predecease the Participant, the Participant's surviving spouse shall be deemed the Beneficiary. If there is no surviving spouse, the benefits shall be paid to the Participant's surviving issue per stirpes. If there are no surviving issue, the benefits shall be paid pursuant to the intestacy laws of the Participant's domicile.
During decedent's life, the assets of the Plan and Trust were held by Bankers Trust Co. of New York (custodian). Shortly after his appointment, Mr. Corn requested that the custodian transfer the assets of the Plan and Trust to him. The custodian refused to transfer the assets until it received M.J. Machat Management Corp.'s corporate resolution authorizing such an 1990 and 1991 tax returns, which reported income derived from the pension funds only to the extent that the assets formerly held in the Plan and Trust were used for the estate's expenses ($295,447 and $367,460 in 1990 and 1991, respectively). The pension funds were used to pay the estate's tax liabilities and other administration expenses including attorney's fees, temporary administrator's fees, apartment rental and maintenance fees, real estate taxes, and storage fees. Some of the expenses paid from the pension funds were made with the surrogate's court approval, while others were made without the surrogate's court approval. In December 1994, after 5 days of trial, the New York County Surrogate's Court's Preminger issued an order directing that decedent's will be admitted to probate on January 5, 1995. On March 30, 1995, Ms. Giacobbi filed papers in the probate court of Greenwich, Connecticut, seeking to have decedent's will admitted to probate. The will was accepted by the probate court, and Ms. Giacobbi and Mr. Sklar were appointed coexecutors on or about March 30, 1995. The pension funds, along with decedent's other assets, are the subject of continuing litigation.
In separate notices of deficiency issued to each of the coexecutors, dated August 14, 1996, respondent determined that the 1988 and 1989 pension distributions were includable in the estate's income when received, and not when expended, by the temporary administrator.
The parties appear to be in agreement that the Plan and Trust meets the requirements of section 401(a) and that there is a trust forming a part of the Plan that is exempt from tax under respondent argues that the distribution of decedent's pension was income in respect of a decedent under section 691(a)(1)(A) and thereby taxable to the estate, which acquired the right to receive the amount. Third, respondent argues that the estate was in actual or constructive receipt of the income, and under the claim of right doctrine, it must include the distributions in the years of receipt. Respondent contends that the estate's use of the pension funds, via the temporary administrator's use of the funds, was not subject to substantial restrictions for tax purposes.
We must first resolve whether the distributions fall within section 402(a)(1) and are thereby covered by its rule. The estate argues that the temporary administrator is not a "distributee" within the meaning of section 402(a)(1) and therefore that the delivery of pension funds to the temporary administrator does not constitute a taxable event. Citing Darby v. Commissioner , 97 T.C. 51, 58 (1991), the estate contends that the term "distributee" is limited to employee/plan participants or their beneficiaries; and because no beneficiary has been determined, no distributee received the pension funds. Respondent argues that the estate is the "distributee" of the funds transferred from the custodian to the temporary administrator Mr. Corn.
Neither the Code nor the regulations define the term
"distributee" as used in section 402(a)(1). The Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406, 88 Stat. 829, and its antialienation provisions, along with pertinent case law, supply significant insight into the correct interpretation of the term "distributee". ERISA was enacted to establish "a comprehensive federal scheme for the protection of pension plan participants and their beneficiaries." American Tel. & Tel. Co. v. Merry , 592 F.2d 118, 120 (2d Cir.
1979). It was intended to ensure that American workers "may look forward with anticipation to a retirement with financial security and dignity, and without fear that this period of life will be lacking in the necessities to sustain them as human beings within our society." S. Rept. 93-127, at 13 (1974), 1974-3 C.B. (Supp.) 1, 13. Promoting this goal, the Congress enacted protective legislation including the antialienation rule. ERISA section 1021(a), 88 Stat. 104, added section 401(a)(13), which requires tax-qualified plans to provide "that benefits provided under the plan may not be assigned or alienated." This prohibition generally precludes the plan from recognizing the rights of creditors with respect to a participant's interest under the plan.
In the years following the enactment of ERISA, litigation raised the issues of whether the antialienation provisions applied to family support obligations and State community property laws. Subsequent amendments addressed these issues. Sections 402(a)(9) and 414(p)(8), as enacted by the Retirement Equity Act of 1984 (REA '84), Pub. L. 98-397, sec. 204(c)(1) and (b), 98 Stat. 1448, 1445, provide that (1) if a qualified domestic relations order (QDRO) designates the spouse, former spouse, child, or other dependent of the plan participant as a person who is to receive the benefits payable with respect to the participant, then that payee is an "alternate payee" and (2) the alternate payee is to be treated as the distributee for purposes of determining taxability of the payments. In this situation, the alternate payee, and not the plan participant, is taxed on the distributions. The Tax Reform Act of 1986 (TRA '86), Pub. L. 99-514, sec. 1898(c)(1)(A), 100 Stat. 2951, modified section 402(a)(9), as enacted by REA '84, to provide that an alternate payee would be the distributee only if the alternate payee were the spouse or former spouse of the plan participant. In summary, section 402(a)(9) provides an exception to the general rule, and where all statutory requirements are fulfilled, the alternate payee is deemed the distributee. Where a QDRO fails to meet the specific requirements of section 414(p), section 402(a)(9) is not person who receives the distribution is not automatically the distributee. Id.
at 64-66.
Interpreting Darby
, the Court in Powell v. Commissioner , 101 T.C. 489, 498 (1993), stated that "an owner was not necessarily a distributee and [that Darby ] specifically observed that its statement that a 'distributee' had to be a participant or beneficiary was not an exclusive definition of that word." Applying the law as modified by REA '84, the Court found that the plan participant's former spouse was the "distributee" and thereby taxable on her share of the pension benefits. Id.
As illustrated by the aforementioned cases, most, if not all, of the case law interpreting the term "distributee" dealt with whether or not a spouse or former spouse with a legal interest in a participant's pension benefits is a distributee under section 402(a)(1) and thereby responsible for paying the taxes on receipt of a distribution. A finding in each case merely shifted tax liability between an employee/participant and his or her spouse or former spouse. It did not insulate all parties from tax liability.
The estate, relying on this case law, urges the Court to adopt a novel interpretation which in effect would permit funds to be distributed by a qualified plan without identifying any distributee. We decline to accept this interpretation. We conclude that the estate is a "distributee" within the meaning of section 402(a)(1). Mr. Corn, acting as the estate's temporary administrator, took possession of the pension funds, and these funds were immediately available for and were, in part, utilized for the estate's benefit. The estate was therefore an interim beneficiary of these funds. See Darby v. Commissioner , 97 T.C.
at 66-67 (distributee generally means plan participant or beneficiary ).
Finding that the estate is a "distributee", we now address whether the estate received a distribution within the meaning of section 402(a)(1). The estate argues that there were no distributions in 1988 or 1989 because it was not in either actual or constructive receipt of the funds. Additionally, the estate argues that the claim of right and constructive receipt doctrines preclude a finding that the estate received income during the years in issue. Respondent argues that the estate was in actual or constructive receipt of income since the distributions were received by the temporary administrator on behalf of and for the benefit of the estate. Respondent contends that the temporary administrator was the estate's agent and therefore his receipt of the funds is equivalent to the estate's receipt of the funds. According to respondent, the temporary administrator's agent status is illustrated by his duty to file the estate's Federal tax returns and pay estate administration expenses.
to the amendment, whenever the employee had an unrestricted right to withdraw his plan benefits, the benefits would be taxable to the employee in that year even though the employee had not actually reduced the benefits to his possession"), affd. without published opinion 91 F.3d 170 (Fed. Cir. 1996).
Further insight into the meaning of the "actually distributed" requirement of section 402(a)(1) is provided by H. Conf. Rept. 97-215, at 239-240 (1981), 1981-2 C.B. 481, 503: Under the House Bill, benefits under a qualified plan (including deductible employee contributions and earnings thereon) are taxed only when paid to the employee or a beneficiary and are not taxed if merely made available. Of course, as under present law, if benefits are paid with respect to an employee to a creditor of the employee, a child of the employee, etc., the benefits paid would be treated as if paid to the employee.
Given the aforementioned history of section 402(a)(1), we conclude that the term "actually distributed" includes the situation herein where funds were paid out of the tax-exempt trust. In amending section 402(a)(1), the Congress intended to address situations where an employee could be taxed on pension funds before their distribution. The change was not directed at situations where the funds were disbursed from the qualified trust. This conclusion is supported by the Congress' intent to treat payments to an employee's creditors, etc., as if the payments were made directly to the employee. In this case, when the plan disbursed these funds to the temporary administrator, a distribution occurred. The funds, upon receipt by the temporary administrator, were no longer held by a qualified trust, and there was an actual distribution under section 402(a)(1). Finally, we address the estate's argument that substantial restrictions and limitations were placed on the temporary administrator's use of the distributed funds and therefore, that under the claim of right and constructive receipt doctrines, the estate did not receive income in the years of the distributions. Underlying the estate's argument is its position that the temporary administrator is not an agent of the estate. See Maryland Cas. Co. v. United States , 251 U.S. 342, 346-347 (1920);
Wilson v. Commissioner
, 12 B.T.A. 403, 405 (1928) ("It is a well established principle of law that receipt by an agent is receipt by the principal.").
Before a 1993 change in New York law which broadened the powers of a temporary administrator, temporary administrators were empowered to perform the following functions: Take personal property into possession and preserve it; pay taxes; publish notice for creditors; and any other actions the court ordered. See N.Y. Surr. Ct. Proc. Act sec. 903 (McKinney 1994); see also In re Barrett's Estate , 82 N.Y.S.2d 137, 142 (Surr. Ct. 1948) (a temporary administrator's "powers are conferred and regulated by statute"); In re Gross' Estate , 31 N.Y.S.2d 610, 611 (Surr. Ct.
1941) (a temporary administrator is a receiver of the court and, in a literal sense, an alter ego of the court); In re Watson's Estate , 205 N.Y.S. 380, 381 (Surr. Ct.) (a temporary administrator represents not only the interest of those taking under the will, but, in the case of rejection, the heirs at law and next of kin), affd. 205 N.Y.S. 382 (App. Div. 1924). While we recognize that New York law explicitly prescribes and limits a temporary administrator's authority, given the nature of a temporary administrator's duties and, in this case, the actions taken by him, the benefits of the temporary administrator's receipt of the pension funds immediately inured to the estate. The pension funds were used to pay the estate's tax liabilities and other administration expenses including attorney's fees, temporary administrator's fees, apartment rental and maintenance fees, real estate taxes, and storage fees. The economic benefit to the estate is not diminished by the fact that, among other things, the temporary administrator lacked the power to distribute any residual funds to the ultimate beneficiary. Cf. Sneed v. Commissioner , 220 F.2d 313 (5th Cir.
1955) (court imposed liability on the surviving spouse for income tax in each of the years that the community income was collected by the executor rather than some later year when distribution was actually made to the widow herself), affg. 17 T.C. 1344 (1952); see also Sproull v. Commissioner , 16 T.C. 244 (1951), affd.
per curiam 194 F.2d 541 (6th Cir. 1952); Moore v. Commissioner , in the estate's gross income upon receipt by the temporary administrator.
We have considered all other arguments made by the parties and found them to be either irrelevant or without merit. To reflect the foregoing, Decision will be entered for respondent as to the deficiencies in tax, and in accordance with the estate's concession for respondent as to the additions to tax under section 6651(a)
.