{ "id": 5366717, "name": "NEIL MacGREGOR et al., Plaintiffs-Appellants, v. BOARD OF TRUSTEES OF THE TEACHERS' RETIREMENT SYSTEM OF THE STATE OF ILLINOIS et al., Defendants-Appellees", "name_abbreviation": "MacGregor v. Board of Trustees of the Teachers' Retirement System", "decision_date": "1994-06-23", "docket_number": "No. 4\u201493\u20141007", "first_page": "439", "last_page": "444", "citations": [ { "type": "official", "cite": "263 Ill. App. 3d 439" } ], "court": { "name_abbreviation": "Ill. App. Ct.", "id": 8837, "name": "Illinois Appellate Court" }, "jurisdiction": { "id": 29, "name_long": "Illinois", "name": "Ill." }, "cites_to": [ { "cite": "26 U.S.C. \u00a7 401", "category": "laws:leg_statute", "reporter": "U.S.C.", "year": 1988, "pin_cites": [ { "page": "(k)" } ], "opinion_index": 0 }, { "cite": "26 U.S.C. \u00a7 403", "category": "laws:leg_statute", "reporter": "U.S.C.", "year": 1988, "pin_cites": [ { "page": "(b)" } ], "opinion_index": 0 }, { "cite": "543 N.E.2d 822", "category": "reporters:state_regional", "reporter": "N.E.2d", "pin_cites": [ { "page": "824" } ], "opinion_index": 0 }, { "cite": "187 Ill. App. 3d 774", "category": "reporters:state", "reporter": "Ill. App. 3d", "case_ids": [ 2663822 ], "pin_cites": [ { "page": "777" } ], "opinion_index": 0, "case_paths": [ "/ill-app-3d/187/0774-01" ] }, { "cite": "26 U.S.C. \u00a7 457", "category": "laws:leg_statute", "reporter": "U.S.C.", "weight": 9, "year": 1988, "pin_cites": [ { "page": "(f)" }, { "page": "(b)", "parenthetical": "deferred compensation plans of State and local governments and tax-exempt organizations" }, { "page": "(f)(1)(A)" }, { "page": "(f)(3)(B)" }, { "page": "(b)(2)" }, { "page": "(e)(5)" }, { "page": "(f)(3)(B)" }, { "page": "(f)(1)(A)" } ], "opinion_index": 0 }, { "cite": "621 N.E.2d 960", "category": "reporters:state_regional", "reporter": "N.E.2d", "pin_cites": [ { "page": "965" } ], "opinion_index": 0 }, { "cite": "251 Ill. App. 3d 166", "category": "reporters:state", "reporter": "Ill. App. 3d", "case_ids": [ 2962192 ], "pin_cites": [ { "page": "173" } ], "opinion_index": 0, "case_paths": [ "/ill-app-3d/251/0166-01" ] }, { "cite": "617 N.E.2d 514", "category": "reporters:state_regional", "reporter": "N.E.2d", "year": 1993, "pin_cites": [ { "page": "519" } ], "opinion_index": 0 }, { "cite": "247 Ill. App. 3d 768", "category": "reporters:state", "reporter": "Ill. App. 3d", "case_ids": [ 2928129 ], "year": 1993, "pin_cites": [ { "page": "776" } ], "opinion_index": 0, "case_paths": [ "/ill-app-3d/247/0768-01" ] } ], "analysis": { "cardinality": 472, "char_count": 10958, "ocr_confidence": 0.786, "pagerank": { "raw": 4.1760663907527704e-08, "percentile": 0.2674682964141925 }, "sha256": "e73662df6ffc9f322eef0975591fdaf3b40a30d6163d1d691d89d45ba981ecc2", "simhash": "1:09f2c23560276493", "word_count": 1746 }, "last_updated": "2023-07-14T21:36:39.761555+00:00", "provenance": { "date_added": "2019-08-29", "source": "Harvard", "batch": "2018" }, "casebody": { "judges": [], "parties": [ "NEIL MacGREGOR et al., Plaintiffs-Appellants, v. BOARD OF TRUSTEES OF THE TEACHERS\u2019 RETIREMENT SYSTEM OF THE STATE OF ILLINOIS et al., Defendants-Appellees." ], "opinions": [ { "text": "JUSTICE KNECHT\ndelivered the opinion of the court:\nPlaintiffs, Neil MacGregor, Robert Procunier, Richard Short and Richard Carrabine, brought this action under the Administrative Review Law (Ill. Rev. Stat. 1991, ch. 110, par. 3\u2014101 et seq.) in the circuit court of Sangamon County to review a decision of the defendant, Board of Trustees of the Teachers\u2019 Retirement System of the State of Illinois, denying them earnings credit under the Illinois Teachers\u2019 Retirement System for contributions made to trust accounts by their employers known as \"rabbi trusts.\u201d The decision of defendant was affirmed by the circuit court. We also affirm.\nPlaintiffs, at the time their rabbi trusts were established, were school administrators and contributing members of the Teachers\u2019 Retirement System of the State of Illinois (TRS). TRS is a statewide pension plan for public school teachers and administrators outside the City of Chicago governed by the provisions of articles 1 and 16 of the Elinois Pension Code (Pension Code). Ill. Rev. Stat. 1991, ch. 108\u00bd, pars. 1\u2014101 et seq., 16\u2014101 et seq.\nEach of the plaintiffs was the beneficiary of a rabbi trust set up for them in 1988 by their respective school districts, intending to defer a portion of their compensation. Rabbi trusts are trusts set up in an employee\u2019s name to which an employer makes an annual contribution for the benefit of the employee. Features of the trust include:\n(1) contributions to the trust are not income currently taxable to the employee;\n(2) interest accruing to the trust is not income currently taxable to the employee;\n(3) assets in the trust are available only for eventual distribution to the employee except they are treated as assets of the employer and can be reached by the employer\u2019s creditors in case of insolvency; and\n(4) assets are income taxable to the employee upon distribution to him.\nAdditionally, receipt of the compensation in plaintiffs\u2019 trusts is contingent on the future performance by them of \"substantial services.\u201d\nWhether contributions made to a given rabbi trust are eligible for tax deferral is a determination ultimately made by the Internal Revenue Service. In the instant case, TRS accepts for purposes of appeal the contributions made to plaintiffs\u2019 trusts are tax-deferred.\nThe school districts employing plaintiffs began reporting their contributions to the plaintiffs\u2019 rabbi trusts to TRS as creditable earnings for pension purposes in 1988. In 1990 plaintiffs discovered the TRS staff was not allowing such contributions to be reported as earnings for purposes of pension credit. Plaintiffs requested an administrative review by the defendant of the staff decision. Defendant held a hearing and on December 18, 1991, issued its written decision denying creditable earnings treatment to plaintiffs\u2019 rabbi trust contributions. Plaintiffs maintain defendant\u2019s denial of creditable earnings treatment for their rabbi trust contributions represents a departure from the clear and unambiguous language of article 16 of the Pension Code (Ill. Rev. Stat. 1991, ch. 108\u00bd, par. 16\u2014101 et seq.) and of TRS\u2019 implementing regulations and, as such, is arbitrary and capricious and against the manifest weight of the evidence.\nReviewing courts will defer to an interpretation placed on a statute by the administrative agency charged with its administration and enforcement. (Cherington v. Selcke (1993), 247 Ill. App. 3d 768, 776, 617 N.E.2d 514, 519.) In addition, courts must not interfere with discretionary authority of an administrative agency unless exercise of the authority is arbitrary and capricious or the administrative decision is against the manifest weight of the evidence. Novosad v. Mitchell (1993), 251 Ill. App. 3d 166, 173, 621 N.E.2d 960, 965.\n\"Salary\u201d for pension purposes is defined in both the Illinois Pension Code and the TRS administrative rules. (Ill. Rev. Stat. 1991, ch. 108\u00bd, par. 16\u2014121; 80 Ill. Adm. Code \u00a7 1650.450 (1991).) Section 16 \u2014 121 of the Pension Code defines \"[sjalary\u201d as: \"The actual compensation received by a teacher during any school year and recognized by the system in accordance with rules of [defendant].\u201d (Ill. Rev. Stat. 1991, ch. 108\u00bd, par. 16\u2014121.) Section 1650.450 of title 80 of the Illinois Administrative Code, as it read in 1988 when plaintiffs\u2019 rabbi trusts first began, states \"salary\u201d includes contributions to deferred compensation plans, salary reduction plans and tax-sheltered annuities. (80 Ill. Adm. Code \u00a7 1650.450(a)(6) (Supp. 1986).) In addition, TRS issues a handbook entitled \"Employer Guide\u201d for employing school districts as a reference to its policies. At the time plaintiffs entered into their rabbi trust arrangements, the employer guide included the following under \"Creditable Earnings\u201d when referring to deferred compensation plans: \"contributions to a deferred compensation plan under section 457 of the Internal Revenue Code [(26 U.S.C. \u00a7 457 (1988))].\u201d\nPlaintiffs argue their rabbi trusts constitute deferred compensation plans under section 457(f) of title 26 of the Internal Revenue Code (Code) (26 U.S.C. \u00a7 457(f) (1988)) and, therefore, fall under TRS\u2019 definition of a deferred compensation plan constituting creditable earnings. Section 457(f) of title 26 of the Code provides that where plans fail to meet the requirements of section 457(b) of title 26 of the Code (26 U.S.C. \u00a7 457(b) (1988) (deferred compensation plans of State and local governments and tax-exempt organizations)), contributions are immediately taxable to the employee in any year \"in which there is no substantial risk of forfeiture.\u201d (26 U.S.C. \u00a7 457(f)(1)(A) (1988).) \"[Substantial risk of forfeiture\u201d is established by showing \"rights to such compensation are conditioned upon the future performance of substantial services by any individual.\u201d 26 U.S.C. \u00a7 457(f)(3)(B) (1988).\nThe Pension Code, however, prohibits the recognition of, as creditable earnings, compensation to which an employee does not have a vested right. Section 16 \u2014 121 defines salary as \"actual compensation received\u201d during a school year (Ill. Rev. Stat. 1991, ch. 108\u00bd, par. 16\u2014121), but contributions made to plaintiffs\u2019 rabbi trusts should not be considered received or vested when made as they were subject to a \"substantial risk of forfeiture\u201d because they were contingent on the future performance of substantial services. Where a beneficiary\u2019s right is contingent on the occurrence of certain events, the right does not vest until the occurrence of the events. Galvan v. Jackson Park Hospital (1989), 187 Ill. App. 3d 774, 777, 543 N.E.2d 822, 824.\nPlaintiff contends TRS accepts other nonvested annuities and plans, specifically section 457(b) plans and section 403(b) annuities (26 U.S.C. \u00a7 403(b) (1988)). Eligible deferred plans under section 457(b) of title 26 of the Code recognize only \"includible compensation.\u201d (26 U.S.C. \u00a7 457(b)(2) (1988).) \"[Ijncludible compensation,\u201d in turn, is compensation which, but for section 457(b), would be immediately taxable under section 457(a) since it is not subject to a substantial risk of forfeiture. (26 U.S.C. \u00a7\u00a7 457(e)(5), (a) (1988).) The same is true of tax-sheltered annuities under section 403(b) and salary reduction plans under section 401(k) \u2014 the other forms of deferred compensation TRS also recognized for pension credit. (26 U.S.C. \u00a7 401(k) (1988).) The tax on plaintiffs\u2019 rabbi trust compensation, however, is deferred only because the compensation does not yet come within section 457(f)(3)(B) of title 26 of the Code, under which income is recognized when the taxpayer\u2019s right to the funds no longer is \"conditioned upon the future performance of substantial services\u201d and thus no longer is \"subject to a substantial risk of forfeiture.\u201d 26 U.S.C. \u00a7 457(f)(3)(B) (1988).\nPlaintiffs are confusing the legal right to compensation \u2014 which is vested in the forms of deferred compensation TRS does credit \u2014 with the risk the payer of the compensation may become insolvent prior to disbursement to the beneficiary and the deferred compensation could be reached by the payer\u2019s creditors, a danger common both to plaintiffs\u2019 rabbi trusts and to the forms of deferred compensation TRS does recognize for pension credit. The sole determinant for purposes of creditable earnings is whether the beneficiary\u2019s right is vested or contingent and, because plaintiffs\u2019 contributions are contingent, they do not fall under the statutory definition of salary.\nFurther, plaintiffs\u2019 rabbi trusts are not deferred compensation plans under section 457 of title 26 of the Code, as required by the TRS employer\u2019s guide. Plaintiffs misinterpret section 457(f), which they concede governs the tax treatment of their rabbi trusts. Section 457(f) provides in relevant part:\n\"(f) Tax treatment of participants where plan or arrangement of employer is not eligible\n(1) In general\nIn the case of a plan of an eligible employer providing for a deferral of compensation, if such plan is not an eligible deferred compensation plan, then\u2014 (A) the compensation shall be included in the gross income of the participant or beneficiary for the 1st taxable year in which there is no substantial risk of forfeiture of the rights to such compensation.\u201d 26 U.S.C. \u00a7 457(f)(1)(A) (1988).\nSection 457(f) of title 26 of the Code is an income recognition rule which governs when compensation must be included in taxable income. Section 457(f) applies to deferred compensation only when the taxpayer\u2019s right to the funds is no longer contingent. Because plaintiffs\u2019 rabbi trust contributions were still subject to a substantial risk of forfeiture at the time earnings credit was requested, they do not come within section 457(f). Since plaintiffs have already admitted their rabbi trusts are not eligible plans within the meaning of section 457(b) of title 26 of the Code and they are not currently taxable under section 457(f), they are not deferred compensation under section 457, which the TRS employer\u2019s guide specifies they must be to be creditable earnings.\nDefendant gave several other reasons for denying creditable earnings treatment to contributions to plaintiffs\u2019 rabbi trusts, which plaintiffs also dispute, but our finding the contributions do not fit the definitions of salary or creditable earning is dispositive of the case. We need not discuss them. Defendant\u2019s decision was not against the manifest weight of the evidence nor was it arbitrary or capricious.\nAffirmed.\nCOOK and GREEN, JJ., concur.", "type": "majority", "author": "JUSTICE KNECHT" } ], "attorneys": [ "Anthony G. Scariano and Daniel M. Boyle (argued), both of Scariano, Kula, Ellch & Himes, Chartered, of Chicago Heights, for appellants.", "Robert G. Lane, Steven F. Molo, and Timothy P. O\u2019Connor (argued), all of Winston & Strawn, of Chicago, for appellees." ], "corrections": "", "head_matter": "NEIL MacGREGOR et al., Plaintiffs-Appellants, v. BOARD OF TRUSTEES OF THE TEACHERS\u2019 RETIREMENT SYSTEM OF THE STATE OF ILLINOIS et al., Defendants-Appellees.\nFourth District\nNo. 4\u201493\u20141007\nArgued May 25, 1994.\n\u2014 Opinion filed June 23, 1994.\nAnthony G. Scariano and Daniel M. Boyle (argued), both of Scariano, Kula, Ellch & Himes, Chartered, of Chicago Heights, for appellants.\nRobert G. Lane, Steven F. Molo, and Timothy P. O\u2019Connor (argued), all of Winston & Strawn, of Chicago, for appellees." }, "file_name": "0439-01", "first_page_order": 457, "last_page_order": 462 }