The opinion of the court was delivered by: Baker, Chief Judge.
SUMMARY JUDGMENT FOR PLAINTIFF
The plaintiff, Florence Y. Barnes, seeks a refund of taxes
and interest paid in connection with her 1978 and 1979 federal
income tax returns. The plaintiff claims that payments made to
her as survivor's insurance benefits under the State
University's Retirement System are "amounts received under a
life insurance contract . . . paid by reason of the death of
the insured" which are exempt from gross income under the
provisions of Internal Revenue Code §§ 101(a)(1) and 101(d).
Jurisdiction is vested in the court under the provisions of
28 U.S.C. § 1346(a)(1).
The plaintiff is the widow of a former employee of the
University of Illinois who during his lifetime was a
contributor to the State University's Retirement System
(SURS). See Exhibit D attached to the First Amended Complaint.
During the tax years 1978 and 1979, the plaintiff received
payments from SURS as "survivor insurance benefits". She
excluded these from taxable income under the provisions of
Internal Revenue Code § 101(a) (1954). The defendant assessed
deficiencies against the plaintiff for the years 1978 and 1979
together with interest. The deficiency assessments and the
interests, in the total amount of $1706.94, were paid by the
plaintiff and a timely claim for refund was made with the
Internal Revenue Service Center at Kansas City, Missouri. The
claim for refund was disallowed and this suit followed. The
issue presented is a narrow one: whether the payments received
by the plaintiff as "survivor insurance benefits" during the
years in question constitute life insurance proceeds which are
excludable from income under § 101(a) of the Internal Revenue
Code of 1954.
Both the plaintiff and the defendant have moved for summary
judgment under the provisions of Fed.R.Civ.P. 56.
SURS has two aspects: first, it provides a retirement
annuity to an employee; and second, it provides survivor's
insurance benefits for the family of the employee after his
death. As a condition of employment each employee of the
University of Illinois contributes eight percent of his salary
to SURS, seven percent goes to fund employees' retirement
annuity, Exhibit D, Section 15-157(1) and (6), and one percent
goes to fund the survivors' insurance benefit, Exhibit D,
Section 15-158. After her husband's death, the plaintiff was
paid the sum of $3,000 per year in monthly installments of
$250. It was those sums that the plaintiff excluded from gross
income and which are the subject of the deficiency assessments
and claim for refunds which are the center of this suit.
The parties are in agreement that in order for the amounts
in controversy to be considered as received under an insurance
contract it is necessary that the survivor insurance benefits
constitute "a binding arrangement
of risk-shifting and risk distribution". Ross v. Odom,
401 F.2d 464, 467 (5th Cir. 1968). It is the plaintiff's contention that
risk-shifting and risk distribution are present while the
defendant asserts that the survivor insurance benefits under
SURS do not involve risk-shifting because (1) the university
plan involves no risk since the amounts are entirely
refundable; (2) the provisions of the plan do not alleviate the
potential financial burden of premature death; and (3) the
survivors' benefits are not payable in all events.
The court is persuaded that the survivor insurance benefits
payable under SURS provide for risk shifting and risk
distribution as described in Ross v. Odom, 401 F.2d 464 (5th
Cir. 1968) and Commissioner v. Treganowan, 183 F.2d 288 (2d
Cir. 1950), cert. denied 340 U.S. 853, 71 S.Ct. 82, 95 L.Ed.
625 (1950). In Ross the government raised the same issues that
are raised here. The retirement system in question was the
state employee's retirement system of Georgia. That system had
both a retirement pension for the employee and a survivor's
benefit for members of the employee's family in case of his
premature death. The government contended that the payments
under the survivor's benefit aspect of the Georgia program were
taxable income but the Fifth Circuit Court of Appeals held that
because of the presence of risk shifting characteristics the
payments were excludable from income as life insurance
proceeds. The Georgia system is parallel to the Illinois
system. It provides for employee and state contributions and
risk-shifting occurs since the state bears a substantial cost
of the plan which is not refundable. The facts of Treganowan
indicate there is no merit in the government's position that
the employee must bear the risk of losing his contributions. In
Treganowan the decedent had paid only $2,160 in contributions
from 1925 to 1941 because of credits from earnings in the fund
and from 1941 through 1945 the decedent and his estate had made
no contributions at all because of a surplus in the gratuity
The government's argument that survivor's benefits are not
payable in all events and therefore do not involve risk
shifting is also without merit in light of Commissioner v.
Noel's Estate, 380 U.S. 678, 85 S.Ct. 1238, 14 L.Ed.2d 159
(1965) where flight insurance was held to have the attributes
of risk shifting even though the proceeds were not payable in
The government's point that the provisions of the plan do
not alleviate the potential financial burden of premature
death escapes the court. Certainly any insurance payments upon
the death of the contributor alleviate the financial burdens
bound to be experienced by his survivors after his death. To
argue otherwise seems nonsense.
Finally, the government argues that SURS is not actuarily
sound. Yet as argued by the plaintiff, and as pointed out in
Ross v. Odom, 401 F.2d at 468, the determining factor is
whether SURS is hypothetically sound but is in fact financially
sound. The annual report of SURS for the year 1979 shows that
the survivor's insurance benefit fund was indeed financially
IT IS THEREFORE ORDERED that the Clerk enter summary
judgment in favor of the plaintiff and against the defendant
in the sum of $1,706.94 and costs of suit.
IT IS FURTHER ORDERED that the cross-motion for summary
judgment of the defendant be, ...