## Facts

- William V. Schelberg was an IBM employee who died in 1974 while still actively employed and before receiving any retirement, disability, or annuity payments under IBM plans.
- IBM maintained several separately adopted and administered employee benefit plans, including group life insurance, retirement, sickness and accident income, and total and permanent disability.
- IBM’s Group Life Insurance Plan included (1) group term life insurance and (2) an “uninsured and unfunded survivors income benefit.”
- The survivors income benefit was payable only to eligible survivors after the employee’s death, in a specified order of preference.
- The survivors income benefit was paid monthly at one-quarter of the employee’s regular monthly compensation and continued until the stated total benefit was exhausted or no eligible survivor remained.
- After Schelberg’s death, IBM began making the survivors income benefit payments to his widow.
- The IRS determined an estate tax deficiency, asserting that the present value of the survivors income benefit (about $95,000) was includible in Schelberg’s gross estate under I.R.C. § 2039, reasoning that the benefit was a continuation of annuity-like payments associated with disability coverage.
- The Tax Court agreed with the IRS, treating IBM’s disability-related benefits as an “annuity” within § 2039 and including the survivors income benefit in the gross estate.

## Issues

1. Whether the survivors income benefit paid to the widow was includible in the decedent’s gross estate under I.R.C. § 2039.
2. Whether contingent disability or wage-continuation benefits under separate employer plans can supply the decedent’s requisite lifetime “annuity or other payment” right needed to treat a survivor-only benefit as taxable under § 2039.
3. Whether a survivor-only benefit tied to an employer’s life-insurance-related plan is a “pure death benefit” outside § 2039’s inclusion rule.

## Decision

- The Second Circuit reversed the Tax Court.
- The court held that the survivors income benefit was not includible in the decedent’s gross estate under I.R.C. § 2039.
- The court concluded that § 2039 did not apply because the decedent had no qualifying lifetime right to annuity-type payments that the survivor benefit continued under the same plan or arrangement.
- The court treated the survivors income benefit as a death-only benefit rather than an annuity continuation.

## Legal Principles

- I.R.C. § 2039 generally requires a connection between (a) the decedent’s enforceable lifetime right to receive an “annuity or other payment” and (b) a beneficiary’s right to receive payments by reason of the decedent’s death under the same plan or arrangement.
- A survivor benefit payable only upon the employee’s death, providing no lifetime payments to the employee, is a death-only benefit and is not within § 2039 merely because it is paid in periodic installments.
- Contingent, event-dependent disability or salary-continuation benefits (dependent on medical and administrative determinations and the occurrence of disability) do not establish the kind of unconditional lifetime annuity right that § 2039 targets.
- Separately adopted and administered employer benefit plans are not treated as a single integrated annuity arrangement without a statutory basis to merge them.
- Payments characterized as life-insurance-type benefits are not brought into § 2039 through recharacterization as an annuity continuation absent a qualifying lifetime payment right in the decedent.

## Conclusion

The court held that a survivors income benefit payable solely by reason of an employee’s death is not includible in the gross estate under I.R.C. § 2039 when the decedent lacked a qualifying lifetime annuity-type right under the same plan and the employer’s disability-related benefits were contingent and separately administered.


Estate of Schelberg v. Commissioner, 612 F.2d 25 (2d Cir. 1979)