Edward D. Rollert Residuary Trust v. Comm'r of Internal Revenue

• Decision Date: 31 March 1983
• Docket Number: Docket No. 16418-79.
• Parties: EDWARD D. ROLLERT RESIDUARY TRUST, GENESEE MERCHANTS BANK v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

80 T.C. 619

EDWARD D. ROLLERT RESIDUARY TRUST, GENESEE MERCHANTS BANK

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 16418-79.

United States Tax Court

Filed March 31, 1983.

1. Prior to his death on Nov. 27, 1969, decedent was an executive vice president of GM. Shortly before the date of death, GM had tentatively determined to issue bonuses for 1969 to a group of employees, including decedent. However, it was not until Mar. 2, 1970—-more than 3 months after the date of death—-that the bonus was formally awarded to decedent. The bonuses were paid under an established deferred compensation plan, with bonuses never having been denied to executive vice presidents and decedent's having received over $300,000 annually in bonuses during the years 1964 through 1968. Held, amounts paid pursuant to this postmortem bonus are income in respect of a decedent, because, under the facts of this case, decedent had a right or entitlement to the bonus payments as of the date of his death.

2. GM also awarded decedent bonuses in each of the years 1964 through 1968. These lifetime bonus awards, as well as the postmortem bonus award for 1969, were payable in annual installments, most of which became payable during years subsequent to 1969. Under decedent's will, rights to receive the bonus installments became part of the residue of the estate. The estate distributed to P, the residuary legatee, the rights to receive certain of these installments when paid in years subsequent to the year of distribution. Both the estate and P treated the distribution of the rights as a distribution of the estate's distributable net income, even though the bonus installments would constitute income in respect of a decedent when paid. In the year the rights were distributed, P reported as income under sec. 662(a), I.R.C. 1954, the date-of-distribution fair market values of the rights, and the estate took a corresponding deduction under sec. 661(a), I.R.C. 1954. Under sec. 1.661(a)-2(f), Income Tax Regs., P took the date-of-distribution values as its basis in the rights, and in the subsequent years when the bonus installments were paid to it, P reported as income only the difference between such basis and the amount received. Held: Sec. 691, I.R.C. 1954, requires P to report the entire amount of bonus installments paid to it as income in the year when received. P had no basis in the rights to receive income in respect of a decedent because the estate's distribution of these rights to petitioner was not a distribution subject to secs. 661 and 662, I.R.C. 1954. Russell E. Bowers and Richard B. Covey, for the petitioner.

Beth L. Williams, for the respondent.

OPINION

WHITAKER , Judge:

Respondent determined deficiencies in petitioner's Federal income taxes in the amounts of $83,795 for 1973; $68,686 for 1974; and $2,675 for 1975.

This case was submitted fully stipulated under Rule 122, Tax Court Rules of Practice and Procedure. The primary issues for decision are: (1) Whether rights to receive bonus payments under the General Motors bonus plan, which were attributable to an individual's employment with General Motors before his death but which were not formally awarded until several months after his death, are rights to income in respect of a decedent; and (2) whether rights to income in respect of a decedent which were distributed by the decedent's estate to petitioner in prior years acquired a basis in the hands of petitioner equal to their fair market value on the date of distribution. With respect to this second issue, we must specifically decide whether the rights to income in respect of a decedent were amounts “properly paid or credited” for purposes of sections 661(a)(2)¹ and 662(a)(2). The second issue applies to post-death installments of bonus awards made prior to death, concededly income in respect of a decedent, as well as the postmortem bonus awards (issue 1), if we determine issue (1) in respondent's favor.

On December 31, 1960, Edward D. Rollert, as settlor, and Genesee Merchants Bank & Trust Co., as trustee, executed a revocable trust agreement (hereinafter trust agreement). This trust agreement provided for the establishment of two separate trusts—-a marital trust and a residuary trust—-to administer assets owned by Mr. Rollert at death. The residuary trust is the petitioner herein. When the petition was filed, the principal place of business of the trustee was Flint, Mich.

For several years prior to his death on November 27, 1969, Edward D. Rollert had been employed as an executive vice president of General Motors Corp. and had participated in the corporation's stock option plan and its bonus plan. These plans were designed to compensate corporate executives and other employees by providing cash and stock bonuses payable in installments in subsequent years. Amounts awarded under the plans were interrelated: if an employee was awarded a stock option bonus, any award under the bonus plan was reduced. All awards under the bonus plan for more than $2,000 were to be paid in cash or stock in annual installments over a 5-year period following the year of award. Bonuses under the stock option plan were in the form of contingent credits for General Motors stock. After the termination of stock options concurrently awarded to the executive, the contingent credits would entitle the executive to receive the stock. Like the bonuses under the bonus plan, the contingent credits under the stock option plan were credited in installments over a 5-year period. However, the period for applying the contingent credits started running from the date the options were terminated. Mr. Rollert's options terminated within 12 months after his death.

During the period between the award of bonus rights under either of these plans and the employee's receipt of the final installment payment attributable to such rights, the employee had to “earn out” his or her right to the award by continuing to be employed by the corporation and not committing acts inimical to the best interests of the corporation. Death relieved an employee from the duty of earning out a bonus; thus, upon an employee's death, his or her estate, or the party entitled to the right, possessed a nonforfeitable right to subsequent installments of the bonus award.

General Motors made awards to Mr. Rollert under both the bonus plan and the stock option plan for each of the years 1964 through 1968. These awards, which exceeded $300,000 for each of these years, are referred to collectively as the “lifetime bonus awards.” When Mr. Rollert died on November 27, 1969, the remaining installment payments of these bonuses became nonforfeitable and payable to Mr. Rollert's estate.

Shown on page 623 is a copy of Joint Exhibit 6-F listing the following information with respect to lifetime bonus awards made to Mr. Rollert:

(A) Year of award determination.—-This shows the year in which the lifetime awards were determined.

(B) Year of receipt.—-This shows the year in which installments of lifetime bonus awards were paid by General Motors and received by the Estate of Edward D. Rollert (hereinafter the estate) or petitioner. Lifetime bonus awards received in cash are so recorded; those received in stock are shown with the number of shares and the fair market value at delivery indicated.

(C) Year of final installment.—-This shows the year in which the final installment of each lifetime bonus award was paid or delivered.

+-----------------------------------------------------------------------+
                ¦INSTALLMENTS OF BONUS AWARDED DURING LIFETIME BUT PAID AFTER DEATH     ¦
                +-----------------------------------------------------------------------¦
                ¦     ¦     ¦     ¦     ¦     ¦     ¦     ¦     ¦     ¦     ¦     ¦     ¦
                +-----------------------------------------------------------------------+
                

Year of award determination Year final installment paid Year of receipt 1970 Year of receipt 1971 Year of receipt 1972
                

 Stock Stock Stock
                Stock Cash # Shs. F.M.V. Cash # Sh. F.M.V. Cash # Sh. F.M.V. Cash  
                1964   1974    ---    222                       223                 ---     222              ---
                1965   1975    1970   ---               $61,500 183                 ---     184              ---
                1966   1975    1971   ---               69,000  202                 $69,000 202              ---
                1967   1974    1972   ---               66,750  260                 66,750  260              $66,750
                1968   1975    1973   ---               73,500  278                 73,500  278              73,500
                1969   1975    ---    298               ---     299                 ---     298              ---
                Totals                520      $45,250  270,750 1445    $113,071.25 209,250 1444    $118,949 140,250
                

Year of receipt 1973 Year of receipt 1974 Year of receipt 1975 Total installments paid after death
                Stock Cash Stock Stock
                # Sh. F.M.V. # Sh. F.M.V. # Sh. F.M.V. Stock (#) Cash  
                223              ---                            223                             ---                                            1112         ---
                184              ---                            184                             184                                            919          $61,500
                203              ---                            203                             203                                            1010         138,000
                259              ---                            259                             260                                            1298         200,050
                278              $73,500                        278                             278                                            1390         294,000
                299              ---                            299                             ---                                            7223         ---
                1446    $119,476 73,500                         446     $67,601                 925                                   $33,878  7223         693,750
                

[Discrepancies in the above Joint Exhibit were not

...