Barr v. Comm'r of Internal Revenue (In re Estate of Barr)

• Decision Date: 03 May 1963
• Docket Number: Docket No. 88247.
• Citation: 40 T.C. 227
• Parties: ESTATE OF WILLIAM E. BARR, DECEASED, FRANCIS M. BARR, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

40 T.C. 227

ESTATE OF WILLIAM E. BARR, DECEASED, FRANCIS M. BARR, EXECUTRIX, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 88247.

Tax Court of the United States.

Filed May 3, 1963.

Thomas C. Taylor, for the petitioner.

Edward H. Hance, for the respondent.

Held, amounts of a ‘wage dividend’ death benefit and a ‘salary’ death benefit, paid to decedent's widow pursuant to discretionary action of the former employer, are not includable in decedent's gross estate either under section 2033 or under section 2039, I.R.C. 1954.

PIERCE, Judge:

Respondent determined a deficiency in estate tax against the estate of William E. Barr, in the amount of $662.98. The issues presented for decision are whether the following items are includable in the decedent's gross estate, under either section 2033 or under section 2039 of the 1954 Code:

(1) The amount of $4,512.18, representing a so-called ‘wage dividend‘ death benefit; and

(2) The amount of $1,742.31, representing a so-called ‘salary‘ death benefit.

The characteristics and attributes of the foregoing amounts will appear in our Findings of Fact.

FINDINGS OF FACT

Some of the facts were stipulated. The stipulation of facts, together with the exhibits identified therein, is incorporated herein by reference.

The petitioner, Frances M. Barr, is the duly qualified and acting executrix of the estate of William E. Barr (hereinafter called the decedent), under letters testamentary granted by the Surrogate's Court of Monroe County, N.Y. Petitioner filed a Federal estate tax return on behalf of the decedent's estate with the district director of internal revenue at Buffalo, N.Y.

Decedent died testate at Rochester on March 30, 1957. At the time of his death, and for 18 years prior thereto, he had been continuously employed by the Eastman Kodak Co. at Rochester.

In or about the year 1912, Eastman had inaugurated a practice of paying to its employees a yearend ‘wage dividend,‘ in recognition of their loyalty and services to the company. Each year in November, Eastman's board of directors held a meeting; and if at said meeting they declared a cash dividend payable to the holders of its common stock, the directors had been authorized and empowered by the stockholders to declare a ‘wage dividend’ to be paid to eligible employees, if in the discretion of the directors, the cash position and the earnings and profits of the company would permit it. In general, such wage dividend was computed at a percentage of the wages and salaries received by an employee over the 5 preceding years. The wage dividend was payable to those Eastman employees who were on the payroll of the company on the last day of its fiscal year;¹ and it was actually paid to them in March of the year following its declaration.

Eastman paid a wage dividend to its employees in every year from 1912 through 1931, with the exception of 1934, when its directors determined that the company's earnings and profits were not sufficient, notwithstanding that a cash dividend was paid to its stockholders for said year.

To be eligible for a wage dividend, and Eastman employee had to be alive and employed by the company on the last day of the Kodak year. The company's policy with regard to payment of death benefits in lieu of a wage dividend to the survivors or the estate of an employee who died during the year, was stated in certain ‘Rules of Eligibility and Participation,‘ and also in a pamphlet prepared by the company and distributed to its employees. Said Rules of Eligibility and Participation provided, so far as here material, as follows:

If before qualifying an employee died in the Kodak year 1957 prior to 11:59 P.M., December 29, 1957, and was not survived by a spouse, child or parent still living at 11:59 P.M., December 29, 1957, the company may, at its option, pay a wage dividend to the estate or other beneficiary that the officers may select.

The wage dividend should not be calculated until the officers of the company have approved the payment. At this time an addition sheet shall be completed and forwarded to the Employee Benefits Department for approval before writing the check. If an employee died after 11:59 P.M., December 29, 1957, having qualified for a wage dividend, but before receiving the wage dividend, a wage dividend is paid to the estate as a matter of right.

The above-mentioned pamphlet for Eastman's employees provided, so far as relevant to the issue here involved, as follows:

Other Payments in Case of Death

In addition to any group life insurance which may be payable, the immediate survivors of Kodak people may expect certain other payments made by the Company. These are (1) an amount equal to the wages or sickness allowance applicable to the balance of the pay period in which death occurred² and (2) an amount equal to the Wage Dividend that would have been paid in the year following death if the individual had lived to qualify under any of the rules which would have entitled him to a Wage Dividend. These payments are made to the husband or wife, if living; otherwise to the children in equal amounts; or to the surviving parent or parents if there are no children. In the event that none of the foregoing were living on payment date but were living at the end of the preceding year, the payment will be made to some other beneficiary.

The company's practice as reflected in the preceding quotation was adopted in 1932, and had in most cases been adhered to since that time. Before actual payment of a sum equivalent to a wage dividend to the survivor of a deceased employee, Eastman's board of directors caused an investigation into the circumstances of the deceased employee's family; and if the board was satisfied that the circumstances justified payment of a wage dividend death benefit, they would usually, but not always, approve payment of an amount equivalent to the wage dividend the employee would have received if he had lived and otherwise qualified therefor. As a result, in some instances wage dividend death benefits were not paid. Also, the board of directors from time to time made changes in the eligibility rules for wage dividends. For example in 1956, the board adopted a rule that those employees whose compensation was more than $45,000 per year were not eligible for wage dividends.³

In instances where creditors of Eastman employees sought to levy attachments on wage dividends, the company has not honored such attachments unless levied after the end of its fiscal year, and after the company's liability to pay a wage dividend had become fixed.

On November 19, 1957, approximately 8 months after decedent's death, Eastman's board of directors adopted a resolution authorizing the payment of a wage dividend to those Eastman employees who would be on the payroll of the company on December 29, 1957 (a date subsequent to decendent's death), with actual payment to be made in March 1958. And then, at a date not shown by the record, the directors approved payment of a wage dividend death benefit to decedent's surviving spouse. Thereafter, in March 1958, approximately 1 year after decedent's demise, Eastman paid to Francis Barr, his surviving spouse, the sum of $4,512.18, which sum was equal to the amount that decedent would have received as a wage dividend if he had lived and had otherwise qualified therefor. On its books of account, Eastman set up a liability at the end of Kodak year 1957 for said amount which it subsequently paid to Frances Barr, in an account designated ‘Miscellaneous Payables— Accrued Death Benefits.’ Eastman had not insured itself under any policy against the payment so made to decedent's widow, nor had it created any fund of its own, from which to make such a payment.

No surviving spouse or relative or executor or administrator of a deceased employee has attempt to enforce a claim against the company for the payment of a wage dividend death benefit, and the company does not consider that any such claim would be enforceable. There have been no assignments or purported assignments of a wage dividend death benefit.

The decedent did not name or designate a beneficiary to receive any wage dividend death benefit that the board of directors might approve for payment in the event of decedent's death prior to qualifying for any wage dividend that said directors might have declared in 1957.

Other than as contained in the above-mentioned Rules of Eligibility and Participation and in the pamphlet distributed to all of Eastman's employees, there was no plan, arrangement, understanding, contract, or agreement between Eastman and decedent, relating to the payment of a wage dividend death benefit.

The second benefit amount involved in the instant case is the so-called salary death benefit. Decendent's death on March 30, 1957, occurred at the end of the first week of Eastman's fourth 4-week period in Kodak year 1957. Thereafter, on April 2, 1957, the company paid to the decedent's surviving spouse, Frances Barr, the sum of $1,742.31, which was equal to the amount that would have been paid to decedent as salary, if he had lived and continued to be employed by Eastman for the remaining 3 weeks of the pay period in which he died. The company charged the payment to an account on its books, designated ‘Death Benefit Expense.‘

Decedent's estate was paid in full by Eastman for the services which he had rendered to that company up to the date of his death.

As was the case with the wage dividend death benefit hereinabove described, a salary death benefit was not paid in the case of every employee who died. Such payments were made only after investigation by the company into the circumstances of the deceased employee's family. Also as has been found with respect to said wage dividend death benefit, the decedent made no contribution of his own funds for the salary death benefit; nor did the company insure against having to make such payment, or create any fund of its own from which to...