Rev. Rul. 75-505

Advice has been requested whether the value of a survivorship annuity receivable under the Judicial Retirement System of Texas is includible in a decedent's gross estate under section 2039 of the Internal Revenue Code of 1954.

The decedent, a former judge of a Texas Court of Civil Appeals, was at the time of retirement from active service in 1971 a fully-covered participant in the Judicial Retirement System. All the amounts paid by the decedent throughout decedent's years of service to assist in funding the System were from community funds. At retirement the decedent elected a reduced annuity payable for life so as to provide a lifetime survivorship annuity for the surviving spouse. The decedent died in 1973; a spouse survived.

Under the provisions of section 2 of the Judicial Retirement Act, Vernon's Annotated Texas Statutes, Art. 6228b, a judge retiring from regular service shall receive monthly a base retirement payment equal to a fixed percentage of the salary being received by a judge of a court of the same classification as that last served by the retiree. Alternatively, the retiree may elect to accept a reduced annuity so as to provide a survivorship annuity for the benefit of a surviving spouse or specified dependent.

Section 5 of the Act provides that every judge shall contribute five percent of the annual salary paid by the State to assist in carrying out the provisions of the Act. It further provides that the amount deducted shall remain in the State General Fund and be subject to appropriation by the State Legislature as other moneys in the Fund, and that the Legislature shall appropriate such sums of money as may be necessary to carry out the Act. However, there is no provision for the establishment of a specific fund for the payment of the annuities described.

Section 6 of the Act provides that if a judge dies, resigns or otherwise leaves office prior to the time when eligibility for retirement benefits is established, the accumulated contributions shall be paid to the judge's estate or a designated beneficiary. Section 6A provides for the payment to a judge's designated beneficiary, heirs or legal representative of any unrecovered contributions upon the death of a retired judge.

Section 2039(a) of the Code provides for the inclusion in the decedent's gross estate of the value of an annuity or other payment receivable by any beneficiary by reason of surviving the decedent under any form of contract or agreement (other than insurance on the decedent's life) if, under such contract or agreement, an annuity or other payment was payable to the decedent, or the decedent possessed the right to receive such annuity or other payment for life or for any period not ascertainable without reference to decedent's death or for any period which does not in fact end before decedent's death.

Section 2039(b) of the Code provides that subsection (a) shall apply to only such part of the value of the annuity or other payment receivable under such contract or agreement as is proportionate to that part of the purchase price therefor contributed by the decedent. It further provides that for the purpose of this section, any contributions by the decedent's employer shall be considered to be contributed by the decedent. (Since the annuities here are unfunded, they are not paid under a qualified plan and section 2039(c) is, therefore, inapplicable here.)

Two specific questions have been presented: (1) whether the payments receivable by the beneficiary are under a "contract or agreement" and (2) whether the amounts withheld from the decedent's salary were "contributions" or "taxes."

For purposes of section 2039 of the Code, a contract or agreement under which payments are receivable by the beneficiary (or the decedent) includes any arrangement, understanding or plan, or any combination of arrangements, understandings or plans arising by reason of the decedent's employment. See section 20.2039-1(b)(1) of the Estate Tax Regulations. The contract or agreement may take the form of a written or an oral agreement and may even take the form of a consistent practice on the part of an employer to pay death benefits, from which an agreement may be implied. See example 4, section 20.2039-1(b)(2) of the regulations.

The report of the Senate Finance Committee on the provisions of section 2039 of the Code (S. Rep. No. 1622, 83rd Cong. 2d Sess. 470 (1954) states:

* * * [T]he following are examples of contracts, but are not necessarily the only form of contracts, to which this section 2039 applies:

* * * * *

(3) A contract or agreement entered into by the decedent and his employer under which the decedent immediately before his death and following retirement was receiving or was entitled to receive an annuity or other stipulated payment, payable to the decedent for the duration of his life and thereafter to a designated beneficiary, if surviving the decedent, whether the payments made after the decedent's death are fixed by the contract or subject to an option or election exercised or exercisable by the decedent.

In this case, the decedent, a retired State employee, was receiving benefits at the time of death pursuant to the provisions of a State statute. Under the option exercised by the decedent at retirement pursuant to the same statute, decedent's surviving spouse became entitled to an annuity for life at decedent's death.

Any question as to the unilateral reduction of the benefits payable to decedent's spouse by reason of the legislative reduction of the current salaries of the sitting judges relates to the valuation of the payments to the spouse rather than the existence of a binding contract. See Rev. Rul. 71-507, 1971-2 C.B. 331, which holds that the value of payments receivable by a surviving spouse as successor to the decedent-husband's right to receive a share of partnership income as a retirement benefit is includible in the decedent's gross estate, any question as to the contingency of reduction of the proportion of partnership income payable upon the future admission of a new partner being one of valuation rather than of includibility.

With respect to question (2), the amounts deducted from the salaries of the judges are characterized by the language of the Act itself as contributions to assist in carrying out the provisions of the Act, rather than as taxes. Furthermore, the provisions for the return of any unrecovered amounts to the decedent's designated beneficiary, heirs or legal representative are typical of pension plans funded by employee contributions and not typical of statutes imposing taxes.

Thus, benefits payable under the Texas Judicial Retirement Act are distinguishable from those payable under the Railroad Retirement Act of 1937, as discussed in Revenue Ruling 60-70, 1960-1 C.B. 372. Revenue Ruling 60-70 holds that the value of a survivorship annuity payable under the Railroad Retirement Act is not includible in the gross estate of a decreased railroad employee based upon the fact that (1) the amounts collected from the employee and the railroad-employer to fund the benefits are excise taxes collected under sections 3201 and 3221 of the Code, and not contributions, and (2) the legislative history and statutory scheme of the Act make it clear that the benefits are not paid under any form of contract or agreement entered into by a decedent or arising by reason of employment.

In view of the foregoing, annuities paid under the Texas Judicial Retirement Act are paid under a contract or agreement within the meaning of section 2039(a) of the Code and the amounts withheld from the decedent's salary pursuant to the provisions of the Act are contributions to the Retirement System, not taxes.

Accordingly, since the decedent's contributions to the Judicial Retirement System (including employer's contributions attributable to the decedent pursuant to section 2039(b)) were from community funds, one-half of the value of the survivorship annuity receivable by the surviving spouse under the System is includible in decedent's gross estate under section 2039 of the Code.