Halliday v. U.S., 80-7882

• Decision Date: 04 September 1981
• Docket Number: No. 80-7882,80-7882
• Citation: 655 F.2d 68
• Parties: 81-2 USTC P 9652 Claudia HALLIDAY, Birmingham Trust National Bank, Executor of Estate of William T. Halliday, Jr., Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant. . Unit B
• Court: U.S. Court of Appeals — Fifth Circuit

Page 68

655 F.2d 68

81-2 USTC P 9652

Claudia HALLIDAY, Birmingham Trust National Bank, Executor of Estate of William T. Halliday, Jr., Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.

No. 80-7882.

United States Court of Appeals, Fifth Circuit.

Unit B

Sept. 4, 1981.

M. Carr Ferguson, James A. Riedy, Ann Belanger Durney, Dept. of Justice, Washington, D. C., for defendant-appellant.

James E. Roberts, Wheeler, Christian & Roberts, Daniel H. Markstein, III, Markstein & Morris, Birmingham, Ala., for plaintiffs-appellees.

Appeals from the United States District Court for the Northern District of Alabama.

Before FRANK M. JOHNSON, Jr. and HATCHETT, Circuit Judges, and SCOTT ^*, District Judge.

FRANK M. JOHNSON, Jr., Circuit Judge:

Taxpayers Claudia Halliday and Birmingham Trust National Bank, the Executor of the Estate of William T. Halliday, Jr., brought suit seeking a refund for the alleged overpayment of federal income taxes. The district court held that certain commissions on insurance renewal premiums did not constitute "income in respect of a decedent" within the meaning of Section 691 of the Internal Revenue Code of 1954. Instead, the commissions were characterized by the district court as proceeds from the sale of a capital asset. Because the lower court applied the incorrect standard for determining "income in respect of a decedent," we reverse.

The decedent, Mr. Halliday, was the proprietor of a Birmingham insurance agency which sold insurance primarily for Mutual of Omaha (Mutual) and United Benefit Life Insurance Company (United), a subsidiary of Mutual. The decedent executed a separate contract with each insurance company specifying, among other things, the terms of compensation for selling the policies. The contracts provided for remuneration in the form of a percentage of all initial premiums. In addition, United agreed to pay the decedent a percentage of subsequent renewal premiums. However, neither contract contained any references to the payment of post-termination or post-death benefits.

Despite the absence of an express provision in the contract, Mutual had a longstanding policy of paying post-death benefits to beneficiaries named by its agents. The policy was embodied into a 1949 corporate resolution authorizing Mutual's officers to negotiate contracts whereby an agent could name a successor in the event of death or permanent disability and, absent such a designation, receive benefits under Mutual's "three-fives" plan. The three-fives plan provided for the payment of not more than five percent of all renewal premiums in effect at an agent's death to a named beneficiary over a period of three years. A subsequent resolution adopted by Mutual in 1957 made clear that an agent could receive benefits under that plan even though the provision was absent from the contract.

Shortly after the decedent's death in 1970, Mutual and United assumed control of the agency. The insurance companies and taxpayers negotiated an agreement settling all affairs between the parties. The executor agreed to "sell, assign, transfer and deliver" the assets of the agency, including insurance expirations and "any other rights pertaining to said insurance business" to the insurance companies. The agreement originally listed goodwill as one of the agency's assets but the term was deleted at Mutual's request. In addition to transferring assets, the executors released the companies from all claims. In return, Mutual agreed to pay $7,999.44 as consideration for the agency's furniture and fixtures and to pay benefits to the estate under the three-fives plan. The agreement also provided that Mrs. Halliday was to receive a lump sum payment representing the renewal commissions owed the decedent at the time of death by virtue of the contract with United.

The benefits paid to the estate under the three-fives plan totalled over $300,000. The estate declared the amount as "income in respect of a decedent" on its fiduciary tax returns. Distributions of $20,176.55 in 1972 and $42,253.83 in 1973 were made by the estate to Mrs. Halliday. Mrs. Halliday reported the payments as income on her tax returns while the estate received a deduction for the estate tax attributable to the income distributed in accordance with Section 691(c).

Taxpayers ultimately filed suit claiming refunds for taxes paid in the years 1971 through 1974. They claimed that the renewal commissions obtained pursuant to Mutual's three-fives plan were paid as consideration for the assets of the insurance agency and did not, therefore, constitute "income in respect of a decedent." Since the agency received a stepped-up basis at decedent's death under Section 1014(a)(1) of the Internal Revenue Code of 1954, the taxpayers apparently claimed that the sale resulted in no taxable gain.

The district court determined that the claim for refund for the year 1971 was barred by the statute of limitations but granted the refund for the years 1972-74. Relying upon Trust Company of Georgia v. Ross, 392 F.2d 694 (5th Cir. 1967), cert. denied, 393 U.S. 830, 89 S.Ct. 97, 21 L.Ed.2d 101 (1968), the district court stated that "income in respect of a decedent" only encompassed income that a decedent had a legal right to receive. Since the contract between Mutual and the decedent contained no references to post-death benefits, the court concluded that the insurance company was under no legal obligation to pay the renewal commissions. As a result, the payments did not qualify as "income in respect of a decedent" and were instead treated as proceeds from the sale of the insurance agency. On appeal, the Government challenges the lower court's decision that the renewal commissions are not income under Section 691.

Section 691(a) provides that gross income of an estate shall include all "income in respect of a decedent." ¹ The phrase is not defined in the statute. However, this deficiency is assuaged somewhat by the regulations. Treas.Reg. 26 C.F.R. § 1.691(a)-1(b) states in pertinent part:

General definition. In general, the term "income in respect of a decedent" refers to those amounts to which a decedent was entitled as gross income but which were not properly includible in computing his taxable income for the taxable year ending with the date of his death or for a previous taxable year under the method of accounting employed by the decedent.

Thus, any income that a decedent is entitled to receive must be included in the estate's gross income. The Code and concomitant regulations do not expressly require that the decedent have a legally enforceable right to the income.

The definition of the phrase was discussed in Trust Company of Georgia v. Ross, supra, 392 F.2d 694. In that case the decedent executed a contract for sale of land although the actual conveyance of the property did not occur until after the decedent's death. The Court deemed the proceeds from the sale to be "income in respect of a decedent." In arriving at that conclusion, the Trust Company of Georgia Court rejected the notion that income under Section 691 depended upon the economic efforts and activities of the decedent and instead determined that the proper test was whether the decedent had a right to the income.

Although it is pertinent to inquire whether the income received after death was attributable to activities and economic efforts of the decedent in his lifetime, these activities and efforts must give rise to a right to that income. And the right is to be distinguished from the activity which creates the right. Absent such a right, no matter how great the activities or efforts, there would be no taxable income under § 691.

392 F.2d at 695. The focus of analysis, therefore, is upon the presence or absence of a right to income at the time of the decedent's death. Accord, Miller v. United States, 389 F.2d 656 (5th Cir. 1968); Keck v. Comm., 415 F.2d 531 (6th Cir. 1969).

The right to income test may not be a paragon of clarity. However, unlike the district court, we do not read the test to require that a decedent have a legally enforceable right to income in order for it to be taxable under Section 691. While this precise question was not at issue in Trust Company of Georgia, the Court did cite and discuss case law that rejected such a narrow interpretation. ² Significantly, that decision did not repudiate the rationale of those cases; instead the Court simply promulgated a "more precise" definition of "income in respect of a decedent." Had the Trust Company of Georgia Court intended to adopt the restrictive definition that the right to income must be legally enforceable, it presumably would have done so in a clear and specific manner. Further, acceptance of the district court's interpretation would unnecessarily restrict the scope of Section 691. Such an interpretation would permit parties to avoid taxation...