TAXATION ‑- INHERITANCE TAX ‑- APPLICABILITY TO RAILROAD RETIREMENT BENEFITS

TAXATION ‑- INHERITANCE TAX ‑- APPLICABILITY TO RAILROAD RETIREMENT BENEFITS.

Widows' and children's benefits under the railroad retirement act are not taxable under the Washington state inheritance tax acts.

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                                                               December 22, 1958

Honorable William S. Schumacher
Chairman, Tax Commission
General Administration Building
Olympia, Washington                                                                                              Cite as:  AGO 57-58 No. 234

Attention:  Inheritance Tax Division

Dear Sir:

            This is in answer to your oral request on the following question:

            Are widows' and children's benefits under the Railroad Retirement Act (45 U.S.C.A. 228 et seq.) taxable under the Washington State Inheritance Tax Acts?

            We answer your question in the negative.

                                                                     ANALYSIS

            This problem emanates from an estate wherein the widows' and survivors' benefits under the Railroad Retirement Act payable to decedent's family are of the approximate value of $17,000.00.  The question is whether the proceeds are exempt from the state inheritance tax acts.

            Prior to 1955, section 228 L of 45 U.S.C.A. provided as follows:

            "No annuity or pension payment shall be assignable or be subject to any tax or to garnishment, attachment, or other legal process under any circumstances [[Orig. Op. Page 2]] whatsoever, nor shall the payment thereof be anticipated."

            In 1955, section 228 L was amended to provide as follows:

           "Notwithstanding any other law of the United States, or of any State, Territory, or the District of Columbia, no annuity or pension payment shall be assignable or be subject to any tax or to garnishment, attachment, or other legal process under any circumstances whatsoever, nor shall the payment thereof be anticipated."  (Emphasis supplied.)

            The inheritance tax division of the Washington state tax commission has taken the position that the proceeds of such benefits represented by their cash value are transferred at death and that the tax attaches not to the "annuities" but to the right of transfer measured by the value of the annuity, hence the exemption of 45 U.S.C.A. 228 L does not apply to the inheritance tax of Washington.  Are these benefits "property" of the estate within the terms of RCW 83.04.010 defining the property subject to tax?

            4 C.C.H. Inheritance, Estate & Gift Taxation, State, Vol. 4, section 1580N observes that amounts payable under Title II of the Social Security Act as amended, are not includable in decedent's gross estate for federal estate tax purposes, according to "Estate Tax Rule 18, Internal Revenue Bulletin 1940-49-10511, page 16."  This ruling holds that these benefits are not includable in the gross estate because the decedent has no control over the designation of the beneficiaries or the amounts payable to them, since these amounts are fixed by the Social Security Act, and further because the decedent has no interest in the fund created under that act.  It is also based upon the theory that benefits payable under the Social Security Act are not paid by virtue of "transfer" by the decedent and do not pass to beneficiaries by rule or by inheritance, but are benefits conferred strictly by statute.

            The Attorney General of Tennessee has held that under the Inheritance Tax Acts of Tennessee, both social security payments under Title II prior to 1940 were taxable,and also that benefits payable under the Railroad Retirement Act prior to the 1955 amendment were taxable.  This, on the theory that the Tennessee inheritance tax was a privilege tax on the right to receive property, and not a direct property tax (which would be exempt under the provisions of the act).

             [[Orig. Op. Page 3]]

            The few remaining, limited authorities on the subject are summarized by Commerce Clearing House as follows:

            "Various other death benefits in which the decedents had no legal interest during their lifetimes have been held not taxable.  A plan which involved no cost to the decedent, who died in 1930, and which, although giving him the right to name and revoke or change the beneficiary, might lapse through failure to name a beneficiary or through prior death of the beneficiary, was held not to be insurance under the federal statute in Dimock, Exr. v. Corwin, (1939) 39-1 USTC P 9336, 306 U.S. 363.  The federal authorities hold that a sum paid upon death under a death benefit plan of the decedent's employer is not includable as proceeds of insurance.  General Counsel's Memorandum No. 17817, 1937-1 C.B. 281.  In Central Hanover Bank and Trust Co., Exr. (Norton Est.), (1939) 40 BTA 268, Dec. 10, 779, it was held that benefits received by virtue of being a member of the stock exchange (funds being supplied by voluntary contribution upon the death of a member, and the beneficiaries being specified in the constitution) are not includable in the gross estate, since the decedent had no legal interest in the funds."  4 C.C.H. Inheritance, Estate & Gift Taxation, State, supra.  (Emphasis supplied.)

            The foregoing authorities lead to the conclusion that the Washington inheritance tax would applyif the decedent held a power of appointment or some interest in the funds or benefits to be received by the decedent's spouse and children in this case.  We can conceive of no other theory or reason which would justify application of the inheritance tax to benefits payable under the Railroad Retirement Act.

            Thus, in life insurance cases, commencing with Occidental Life Insurance Company v. Powers, 192 Wash. 475, 74 P. (2d) 27, through State of Washington v. Leuthold, 152 Wash. Dec. 250 [[52 Wn. 2d 299]], the power of appointment, outright ownership, a fixed community property right or other interest is by definition "property" within the meaning of RCW 83.04.010, and is therefore, part of the taxable estate.

            Previously, the tax was measured on that portion of the property which actually "passed" by inheritance, which was the taxable event.  This was the  [[Orig. Op. Page 4]] rule in In re Wright's Estate, 31 Wn. (2d) 905, 200 P. (2d) 478, which was overruled by the Leuthold case, supra.

            In our view then, to give full efficacy to the decisions in the Leuthold case, supra, and justify exclusion of railroad retirement benefits from the Washington state inheritance tax, it is necessary to conclude that the benefits which the surviving spouse and minor children in this case will receive were not subject to an interest, power of appointment or other property right of either the decedent or the surviving spouse or the children and were not purchased by the decedent prior to his death, or diverted, or subject to be diverted, by any voluntary act of decedent prior to his death.

            There have been no federal cases deciding this particular problem or construing the exemption provisions of the federal code here in question.  However, the case in question has been decided administratively by the Railroad Retirement Board as follows:

            ". . . While these benefits are called 'insurance annuities' they are not derived from any insurance policy.

            "Annuities under the Railroad Retirement Act are paid by the Federal Treasury at the direction of the Railroad Retirement Board to widows and certain other survivors or railroad employees who qualify on the basis of a statutory right.  While these annuities may be to a certain extent measured by compensation received by railroad employees with respect to which they and their employers were liable for taxes under the Railroad Retirement Tax Act, the annuities bear no necessary relation to such taxes.  These annuities are in nowise paid in consideration of, and their amounts are not dependent upon, the taxes paid by railroad employees under the Railroad Retirement Tax Act, which is entirely independent of the Railroad Retirement Act.  The Tax Act is a revenue raising measure adopted under the general taxing power of Congress and administered not by the Railroad Retirement Board but by the Internal Revenue Service.  Cf. Steward Machine Co. v. Davis, 301 U.S. 548 (1936); Helvering v. Davis, 301 U.S. 619 (1936).  Coverage is not voluntary, and the railroad employee has no alternative but to pay the tax imposed; under no  [[Orig. Op. Page 5]] circumstances is he entitled to a refund except to the extent the tax was improperly collected in the first instance.  Many railroad employees, whose widows and certain other survivors receive annuities under the Railroad Retirement Act, have not been obligated to pay any taxes under the Tax Act and many other such employees have been liable for only negligible amounts.  The Tax Act applies only to compensation received after 1936.

            "Mrs. Johnson and her children receive their insurance annuities, not because of any designation of beneficiary, but only because the Railroad Retirement Act provides that insurance annuities shall be paid to them.  Under the Act, no individual has the power to designate any person to receive any kind of an annuity.  A railroad employee has no control whatever over the right of his wife to a widow's insurance annuity, or the right of any of his children to a child's insurance annuity, under the Railroad Retirement Act upon his death; and, of course, no State has the power to determine or enforce payment of these annuities as it might have if they represented a contractual right.  Thus, the character of these annuities makes it appear, without regard to the tax exemption provisions applicable to all annuity payments contained in section 12 of the Railroad Retirement Act, that a right to receive such annuities is not subject to the inheritance tax laws of the State of Washington."  (Letter of February 7, 1958 from the Railroad Retirement Board to Mr. Burns Poe, Attorney at Law.)

            We believe that he interpretation of the Federal Administrative Board in this case is reasonable and that in the absence of authorities to the contrary, that their construction of the Federal Act should prevail here.  Their construction leads to the conclusion that the value of the benefits to be paid to decedent's survivors is not ". . . property . . . and any interest therein . . . tangible or intangible . . . or the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom . . ." (RCW 83.04.010.)

             [[Orig. Op. Page 6]]

            We trust that the foregoing will be of assistance to you.

Very truly yours,

JOHN J. O'CONNELL
Attorney General

JOHN W. RILEY
Assistant Attorney General