Cotnam v. CIR, 16902.

• Decision Date: 23 January 1959
• Docket Number: No. 16902.,16902.
• Citation: 263 F.2d 119
• Parties: Ethel West COTNAM, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

263 F.2d 119 (1959)

Ethel West COTNAM, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 16902.

United States Court of Appeals Fifth Circuit.

January 23, 1959.

Winston B. McCall, William S. Pritchard, Birmingham, Ala. (Victor H. Smith, Pritchard, McCall & Jones, Birmingham, Ala., of counsel), for petitioner.

James P. Turner, Melva M. Graney, Lee A. Jackson, Dept. of Justice, Washington, D. C., Charles K. Rice, Asst. Atty. Gen., Charles P. Dugan, Special Atty., Int. Rev. Serv., Washington, D. C., Nelson P. Rose, Chief Counsel, Int. Rev. Serv., Washington, D. C., for respondent.

Before RIVES, BROWN and WISDOM, Circuit Judges.

WISDOM, Circuit Judge.

The tax snarls in this case are a result of a contract to make a will and the promisee's successful suit against the promisor's estate for breach of that contract.

In 1940 T. Shannon Hunter of Mobile, Alabama promised to give Mrs. Ethel Cotnam one-fifth of his estate, if she would serve him as an attendant or friend¹ for the rest of his life. Mrs. Cotnam quit her job at the Saenger Theatre, left her home in Springhill, moved to Mobile, and served T. Shannon Hunter faithfully as attendant and friend until he died four and a half years later. He died without a will. In 1948, after a long, hard-fought suit against the Administrator of the Estate of T. Shannon Hunter, the Supreme Court of Alabama upheld the validity of Mrs. Cotnam's contract with Hunter and awarded her a judgment of $120,000.² Attorneys' fees were $50,365.83. The Commissioner of Internal Revenue determined a deficiency in income tax against Mrs. Cotnam of $36,985.02.

The Commissioner treated the $120,000 as taxable income and, in accordance with Section 107 of the Internal Revenue Code of 1939, apportioned the sum over the four and a half year period when Mrs. Cotnam served as Hunter's attendant. The Commissioner allowed a deduction for attorneys' fees for 1948.

The Tax Court upheld the Commissioner. 28 T.C. 947. The case is before us on the taxpayer's petition for review of the Tax Court decision.

(1) This Court is asked to decide whether the sum of $120,000 paid Mrs. Cotnam was exempt as a bequest or was taxable income for services rendered. (2) If the sum was income to Mrs. Cotnam, secondary questions arise as to the attorneys' fees: (a) Should the amount paid the attorneys from the judgment in favor of Mrs. Cotnam be excluded from the taxpayer's gross income, on the theory that it was not income to her? (b) If included in the taxpayer's income, should the attorneys' fees be apportioned ratably over the four and a half years Mrs. Cotnam served Hunter or should the entire amount be deducted as an expense in 1948, the year it was paid?

This Court is unanimously of the opinion that the amount Mrs. Cotnam received was taxable income to her. A majority of the Court hold that the sum paid the attorneys was not taxable income to Mrs. Cotnam.

I.

Section 22(b) (3) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 22(b) (3), provides that the value of property acquired "by gift, bequest, devise, or inheritance" shall be excluded from gross income. The taxpayer argues that under Alabama law the contract operated as a will, she assumed the status of a legatee, the amount she received was a bequest and exempt from federal income tax.

State law determines what property rights and interests a taxpayer has, but federal law determines the consequences of such rights and interests for tax purposes. The meaning of "gift, bequest, devise, or inheritance" in federal revenue laws is a matter of federal law. Lyeth v. Hoey, 1938, 305 U.S. 188, 59 S.Ct. 155, 158, 83 L.Ed. 119. In the Lyeth case the court held:

"The question as to the construction of the exemption in the federal statute section 22(b) (3) is not determined by local law. * * * Congress establishes its own criteria and the state law may control only when the federal taxing act by express language or necessary implication makes its operation dependent upon state law. * * * There is no such expression or necessary implication in this instance."

The court was specifically concerned with the meaning of the term "inheritance", but also implied that a judgment enforcing a contract to make a will could in some cases operate as a bequest.

"In exempting from the income tax the value of property acquired by `bequest, devise, or inheritance\', Congress used comprehensive terms embracing all acquisitions in the devolution of a decedent\'s estate. * * * If in any appropriate proceeding, instituted by him as heir, he had recovered judgment for a part of the estate, that part would have been acquired by inheritance within the meaning of the act."

The nature of the transaction underlying the judgment, not the judgment itself, controls the tax effects. United States v. Safety Car Heating Co., 1936, 297 U.S. 88, 56 S.Ct. 353, 80 L.Ed. 500; Arcadia Refining Co. v. Commissioner, 5 Cir., 1941, 118 F.2d 1010. The amount received is taxable or nontaxable according to what it represents. If the judgment was for an amount due under a contract for personal services, a reference in the judgment or the opinion supporting it to the sum recovered as "in the nature of a bequest" will not change the compensation from taxable income to an exempt bequest. Thus, in order to acquire property by inheritance, a party must bring suit against the estate as an heir. He must participate in the proceeds as an heir. One seeking to acquire property by bequest stands on the same side of the fence. He must sue as a legatee.

A contract to make a will giving one-fifth of the promisor's estate in consideration of the promisee's personal services is a contract, not a will. It is supported by consideration. It is irrevocable, except by mutual consent. Liability arises from its breach. A will is revocable, ambulatory, the antithesis of a contract in fundamental respects. "If the contract is thought of as a contract to pass property at death, and the will thought of as a vehicle for passing the property, much of the confusion and conflicts would disappear. The contract, not the will, gives the promisee a right to the property, and when litigation arises, it is the contract that must always be established. Once the contractual right is established the interests of the promisee are protected whether or not a will has been executed." Sparks, Contracts to Make Wills (N.Y.U.1956), p. 112.

When Hunter died without a will Mrs. Cotnam's only remedy was by an action on the contract. The relief available depends upon principles of contract law, and the fact that the consideration moving from the promisor was the making of a will does not distinguish it from any other contract where a promisee has to do something or give something. The substance of the Hunter-Cotnam transaction was Hunter's agreement to give one-fifth of his property to Mrs. Cotnam on his death for her services. The Alabama Supreme Court enforced a contract, not a non-existent will.

The pleadings in the Alabama proceedings show clearly that Mrs. Cotnam's claim was based on the theory of a contract for services. The original claim in the probate court of Mobile County stated: "Estate of T. Shannon Hunter, deceased, In account with Ethel W. Cotnam. Amount owing and due to Ethel W. Cotnam under an agreement between T. Shannon Hunter and Ethel W. Cotnam, by which she was to receive and be paid a sum equal to one-fifth (1/5) of the value of his estate, which agreement has been fully performed on her part, and for services rendered — $175,000.00." The amended claim before the Circuit Court, where the case was tried de novo, is to the same effect.³ The Alabama Supreme Court held that "agreements of this kind * * * are binding * * * Such a right being contractual, is not affected by a will or its probate". Merchants National Bank of Mobile v. Cotnam, 1948, 250 Ala. 316, 34 So.2d 122, 126.

The legal proceedings against Hunter's estate were instituted under Title 61, section 216 of the Code of Alabama 1940.⁴ A proceeding under this section "is not intended to lead to a personal judgment, but * * * is in the nature of a declaratory judgment to determine the validity of the claim which has been filed against the estate". Merchants National Bank v. Cotnam. The Alabama court pointed out however that the parties and the court tried the case in the circuit court on appeal, "as if it were a common law action begun as such. To that extent it did not conform to section 216" of Title 61 of the Alabama Code. The Supreme Court of Alabama said that in addition to relief under the Code, "a claim for damages for the breach of a contract is also an alternative remedy available to her, * * * and an account for services rendered on a quantum meruit * * * We see no reason why the parties cannot with the consent of the court convert it into such an action and have a personal judgment accordingly rendered".

In Blease v. Commissioner, 1929, 16 B.T.A. 972, on similar facts, the court held that money recovered in a judgment against an estate was taxable income, not a bequest. "Complainant the taxpayer proceeded at law and sought and recovered only a money judgment which gave to her a claim as we believe, superior to that of any legatee or devisee * * * We are clearly of the opinion that complainant participated in the estate of testator as a creditor and not as a legatee and that the amount recovered by her was compensation for services rendered."

In Davies v. Commissioner, 1954, 23 T.C. 524, the taxpayer was a nurse, secretary, and bookkeeper for a doctor who had promised to provide for her in his will. He died intestate. She filed a claim in the probate court. When the jury could not reach a verdict, the claim was compromised for $8,500. The court held: "Actually, Gertrude did not receive the $8,500 or any part of it by bequest, devise, or inheritance from Tivnen. She did not receive anything by inheritance from him because she was not related to...