ESTATE OF RICHARTZ

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Docket Number

Docket No. S.F. 18931.

Attorney(S)

James W. Hickey, Charles J. Barry and John D. O'Hara for Appellant. Graham Morse and Francis L. Tetreault for Respondent.

Judges

Homer R. Spence

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Smart Summary

Factual and Procedural Background

This appeal arises from an order of the Superior Court of the City and County of San Francisco that sustained objections to the report of an inheritance tax appraiser and fixed an inheritance tax. The order exempted certain death benefits paid to the respondent, Margaret Kelly, by the San Francisco and State of California Retirement Systems. The deceased, Ida Anna Richartz, was a teacher who died during active service. Upon her death, the respondent, her sister and designated beneficiary, received payments totaling $8,048.55 from the San Francisco Teachers' Retirement Fund and $846.50 from the State Retirement Fund. These payments included six months' compensation immediately preceding death and the decedent's contributions with accrued interest. The appellant, Robert C. Kirkwood, as State Controller, challenged the exemption of these payments from state inheritance tax. The case was heard by the Supreme Court of California, which reversed the lower court's order.

Legal Issues Presented

Whether the death benefit payments made to the respondent by the San Francisco and State of California Retirement Systems constitute proceeds from an "insurance policy" within the meaning of the Revenue and Taxation Code and are therefore exempt from state inheritance tax.
Whether the statutory definition of "insurance policy" and the terms of the inheritance tax exemption apply to these retirement system death benefits.

Arguments of the Parties

Appellant's Arguments

The payments made by the retirement systems are not proceeds of an "insurance policy" as defined by statute and thus are subject to inheritance tax.
The retirement system benefits lack a formal written insurance contract with fixed terms and conditions, as the terms are subject to modification solely by the public entity.
The statutory exemption applies only to proceeds of a life or accident insurance policy payable by reason of death of the insured, which is not the case here.

Respondent's Arguments

The respondent contended that the death benefits are analogous to insurance policy proceeds, citing the case Shaw v. Board of Administration, which likened retirement system benefits to insurance rights.
Respondent also cited New York cases holding death benefits under retirement plans to be in the nature of insurance and thus exempt.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Estate of Simpson, 43 Cal.2d 594	Clarification that Government Code section 31452 exempts certain payments from property tax but not from inheritance tax.	Used to distinguish the scope of exemption statutes and confirm that retirement benefits are not automatically exempt from inheritance tax.
Estate of Barr, 104 Cal.App.2d 506	Recognition that retirement fund contributions and death benefits involve elements of risk shifting and risk distribution similar to insurance.	Referenced to acknowledge insurance-like characteristics but not sufficient to classify benefits as proceeds of an insurance policy under the statute.
County of Los Angeles v. Frisbie, 19 Cal.2d 634	Statutory interpretation principle that words should be given their ordinary meaning unless otherwise indicated.	Supported the court's approach to interpret "insurance policy" in its ordinary, statutory sense.
Packer v. Board of Retirement, 35 Cal.2d 212	Recognition that retirement system terms may be subject to unilateral modification by the public entity.	Used to contrast retirement system arrangements with traditional insurance policies, which have fixed terms negotiated between parties.
Kern v. City of Long Beach, 29 Cal.2d 848	Similar to Packer, addresses the nature of retirement system benefits.	Supports the conclusion that retirement benefits are not insurance policy proceeds.
Wallace v. City of Fresno, 42 Cal.2d 180	Further discussion on retirement system benefits and their characteristics.	Reinforces distinction between retirement benefits and insurance policy proceeds.
Shaw v. Board of Administration, 109 Cal.App.2d 770	Characterization of retirement system death benefits as similar to insurance rights.	Distinguished by the court as not controlling for inheritance tax exemption purposes.
In re O'Donnell's Estate, 153 Misc. 480	Held death benefits under New York retirement plan were in the nature of insurance.	Considered not controlling due to different statutory language and context.
In re Fitzsimmons' Estate, 158 Misc. 789	Similar holding to O'Donnell regarding nature of death benefits.	Not persuasive for California inheritance tax exemption interpretation.
In re Newton's Estate, 177 Misc. 877	Distinguished accumulated contributions from insurance proceeds for exemption purposes.	Supports the court's view that only true insurance proceeds qualify for exemption.
In re Burtman's Estate, 180 Misc. 299	Similar to Newton, distinguishing contributions from insurance proceeds.	Supports limiting exemption to insurance policy proceeds only.

Court's Reasoning and Analysis

The court began by examining the statutory definitions governing the inheritance tax exemption for proceeds of insurance policies, particularly Revenue and Taxation Code sections 13721, 13723, and 13724. The statute defines an "insurance policy" as a life or accident insurance policy payable by reason of death of the insured. The court noted that the retirement system payments at issue included salary compensation for six months prior to death and contributions with accrued interest, paid pursuant to a municipal charter provision.

The court acknowledged that the retirement systems serve primarily to provide annuities upon retirement but also provide death benefits. While these benefits involve actuarial adjustments and risk distribution elements resembling insurance, the court emphasized that the statutory exemption applies strictly to proceeds of an "insurance policy," which is a formal written contract with fixed terms between insurer and insured.

Since no such written insurance policy existed here, and the terms of the retirement plan could be modified unilaterally by the public entity, the court held that the payments do not qualify as insurance policy proceeds. The court also rejected reliance on cases analogizing retirement benefits to insurance rights when those cases did not involve inheritance tax exemption statutes with precise language limiting the exemption.

The court concluded that the statutory language must be given its ordinary and precise meaning, and that the exemption does not extend to death benefits paid under these retirement systems. It noted that if such an exemption is desired, it should be clearly enacted by the Legislature.

Holding and Implications

The court's final ruling was to reverse the order of the Superior Court, holding that the death benefits paid by the San Francisco and State of California Retirement Systems do not constitute proceeds of an "insurance policy" exempt from state inheritance tax.

Holding: The exemption from state inheritance tax does not apply to the retirement system death benefits in question because they are not proceeds of an insurance policy as defined by statute.

Implications: This decision directly affects the parties by subjecting the retirement system death benefits to inheritance tax. The court did not establish new precedent beyond statutory interpretation, emphasizing that any expansion of exemptions must come from clear legislative enactment.

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Estate of IDA ANNA RICHARTZ, Deceased. ROBERT C. KIRKWOOD, as StateController, etc., Appellant, v. MARGARET KELLY, Respondent.

SPENCE, J.

The State Controller appeals from an "Order Sustaining Objections to Report of Inheritance Tax Appraiser and Fixing Inheritance Tax," which order had exempted certain death benefits paid to respondent by the San Francisco and State of California Retirement Systems. Government Code, section 31452, exempts such payments from property taxation but not from the state inheritance tax. ( Estate of Simpson, 43 Cal.2d 594 [ 275 P.2d 467].) The question now presented is whether such payments, as respondent claims, constitute proceeds from an "insurance policy" (Rev. Tax. Code, § 13721) and are therefore exempt from the inheritance tax (Rev. Tax. Code, §§ 13723-13724). Appellant challenges the propriety of the order exempting such payments and, in our opinion, his position must be sustained.

Section 13721: "Insurance policy," as used in this article, means a life or accident insurance policy the proceeds of which are payable by reason of the death of the insured.

Section 13723: Except to the extent specified in section 13724, the payment or right to receive payment of the proceeds of either of the following insurance policies is a transfer subject to this part:
(a) Any insurance policy issued after June 25, 1935, which is payable to a named beneficiary.
(b) Any insurance policy issued on or before June 25, 1935, which is payable to a named beneficiary and under which the insured has the right to change the beneficiary or has the right of cash surrender.
Section 13724: In addition to the exemptions allowed by this part, the payment or right to receive payment of fifty thousand dollars ($50,000) of the proceeds of either of the insurance policies mentioned in section 13723 is not subject to this part, with the following limitations:
(a) Where there is more than one policy, whether of the same or a different type, only fifty thousand dollars ($50,000) of the aggregate proceeds is not subject to this part.
(b) Where there is more than one beneficiary, the fifty thousand dollars ($50,000) shall be prorated among the beneficiaries in proportion to the amount of insurance payable to each.

The appeal is presented on an agreed statement. The deceased, a teacher, died during her term of active service. Respondent, her sister and designated beneficiary, thereupon was paid $8,048.55 by the San Francisco Teachers' Retirement Fund and $846.50 by the State Retirement Fund. The $8,048.55 consisted of the amount earnable by the decedent during the six months immediately preceding her death ($3,157.00), plus the amount of her contributions to the fund with accrued interest ($4,891.55); and was paid pursuant to section 165.2(e) of the Charter of the City and County of San Francisco. The parties agree that, for the purpose of the question here involved, the $846.50 received from the State Retirement Fund should be treated in the same manner as that part of the local retirement payment which represents contributions of the decedent.

"If a member [of the retirement system] shall die before retirement, regardless of cause, a death benefit shall be paid to his estate, or designated beneficiary, consisting of the compensation earnable by him during the six months immediately preceding death, plus his contributions [to the retirement system] and interest credited thereon."

[1] The primary purpose of the retirement systems was unquestionably to provide for an annuity to the employee upon retirement. However, the San Francisco system did provide for a death benefit as above noted. In this connection, the parties stipulated in the agreed statement that "The portion of the San Francisco death benefit consisting of the equivalent of six months' compensation becomes payable immediately a teacher becomes a member of the system." It was further stipulated that "The San Francisco Teachers' Retirement Fund is supported one-half from tax revenues and one-half by contributions by the members. The amount of the respective contributions are adjusted from time to time as actuarial computations dictate to maintain the fund in solvent condition to meet all future liabilities as actuarially computed."

Thus, the death benefit proper was payable in the event that an employee might die shortly after entering the service, and the manner of adjusting the retirement fund contributions in accordance with actuarial computations suggests that there were elements of risk-shifting and risk-distribution similar to those involved in "insurance." (See Estate of Barr, 104 Cal.App.2d 506, 508-509 [ 231 P.2d 876].) But the question remains as to whether the death benefit payments constituted the "proceeds" of an "insurance policy" within the meaning of the exemption statute. (Rev. Tax. Code, §§ 13721, 13723-13724.)

[2] Words in a statute should be given their ordinary meaning unless otherwise clearly intended or indicated. ( County of Los Angeles v. Frisbie, 19 Cal.2d 634, 642 [ 122 P.2d 526].) The Legislature has defined a policy of insurance to be "the written instrument in which a contract of insurance is set forth." (Ins. Code, § 380.) [3] It is commonly understood to be the formal written document expressing the consideration, the terms and stipulations as negotiated between the parties in final settlement of the respective obligations of the insurer and the insured. (Words and Phrases, vol. 32, p. 793; 44 C.J.S. "Insurance," § 1, p. 471 et seq.) But no such written instrument is involved here. Rather, it appears that the deceased, without the exercise of choice or the right to specify any conditions, automatically became a member of the respective retirement systems. There was no determination of fixed terms of insurance as usually found in an insurance policy, but on the contrary, the terms were subject to modification, within reasonable limits, by only one party to the retirement plan — that is, the public body. ( Packer v. Board of Retirement, 35 Cal.2d 212, 214, 218-219 [ 217 P.2d 660]; also Kern v. City of Long Beach, 29 Cal.2d 848, 855 [ 179 P.2d 799]; Wallace v. City of Fresno, 42 Cal.2d 180, 183 [ 265 P.2d 884].) [4] Regardless of the rule of strict construction in determining an alleged claim of exemption from a general tax statute ( Estate of Simpson, supra, 43 Cal.2d 594, 597), it is clear that by no process of reasoning can it be said that an "insurance policy" issued here. Accordingly, the death benefits would not qualify as proceeds of an "insurance policy" to sustain their exemption from the state inheritance tax.

Respondent cites the case of Shaw v. Board of Administration, 109 Cal.App.2d 770 [ 241 P.2d 635], where the rights of a previously divorced widow to death benefits as designated beneficiary under the California State Employees' Retirement System were likened to similar rights prevailing under an insurance policy. That case did not concern inheritance taxation, and its general reference to insurance principles in solution of a totally different problem has no bearing on the precise meaning of the terms of exemption used by the Legislature for purposes of the state inheritance tax. Nor are the New York cases cited by respondent — In re O'Donnell's Estate, 153 Misc. 480 [275 N.Y.S. 445], and In re Fitzsimmons' Estate, 158 Misc. 789 [287 N.Y.S. 171] — in point. While those cases held that death benefits paid under the New York City retirement plan were in the "nature of insurance," they were not dealing with a statute limiting the exemption to proceeds from an "insurance policy." Later New York cases have classified death benefits received under their retirement system as "insurance" payments within the wording of their exemption statute but have distinguished the accumulated salary deductions representing the deceased employee's contributions, plus interest, as without the exemption. ( In re Newton's Estate, 177 Misc. 877 [32 N.Y.S.2d 473]; In re Burtman's Estate, 180 Misc. 299 [41 N.Y.S.2d 778].) This distinction manifestly has no bearing under the precise limitation of our statute in exempting "proceeds" of an "insurance policy." If it is deemed desirable to exempt from inheritance tax such payments as were made here under city and state retirement plans, the Legislature should so provide in unmistakably clear language.

The order is reversed.

Gibson, C.J., Shenk, J., Edmonds, J., Carter, J., Traynor, J., and Schauer, J., concurred.