Edward D. Rollert Residuary Trust, Genesee Merchants Bank and Trust Co. v. C.I.R., 83-1613

• Decision Date: 16 January 1985
• Docket Number: No. 83-1613,83-1613
• Parties: -685, 85-1 USTC P 13,603, 85-1 USTC P 9139 EDWARD D. ROLLERT RESIDUARY TRUST, GENESEE MERCHANTS BANK AND TRUST COMPANY, Trustee, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1128

752 F.2d 1128

55 A.F.T.R.2d 85-685, 85-1 USTC P 13,603, 85-1

USTC P 9139

EDWARD D. ROLLERT RESIDUARY TRUST, GENESEE MERCHANTS BANK AND TRUST COMPANY, Trustee, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 83-1613.

United States Court of Appeals, Sixth Circuit.

Argued Oct. 9, 1984.

Decided Jan. 16, 1985.

Webb F. Martin, Russell E. Bowers (Lead Counsel), Flint, Mich., Richard B. Covey, argued, New York City, for petitioner-appellant.

Fred T. Goldberg, Jr., Chief Counsel, Joel Gerber, Acting Chief Counsel, Internal Revenue Service, Glenn L. Archer, Jr. (Lead Counsel), Michael L. Paup, Tax Division, Dept. of Justice, Robert A. Bernstein, Robert S. Pomerance, argued, Washington, D.C., for respondent-appellee.

Before KENNEDY and WELLFORD, Circuit Judges, and WEICK, Senior Circuit Judge.

WEICK, Senior Circuit Judge.

Petitioner-Appellant, Edward D. Rollert Residuary Trust, Genesee Merchants Bank and Trust Company, Trustee, (Taxpayer), appeals from a judgment of the Tax Court determining deficiencies in Taxpayer's income tax for the years 1973, 1974 and 1975. This case presents a question of first impression in the Tax Court and in this circuit concerning the applicability and interaction of section 691 and sections 661 and 662 of the Internal Revenue Code of 1954 (26 U.S.C.). For the reasons hereinafter stated, we affirm the judgment of the Tax Court.

I.

The facts of this case are undisputed, having been established by stipulation. While we summarize the facts here, a more thorough statement of the case may be found in the opinion of the Tax Court, Rollert Residuary Trust v. Commissioner, 80 T.C. 619 (1983). Edward D. Rollert (decedent) was an executive vice-president of General Motors Corporation (G.M.) at the time of his death on November 27, 1969. For several years prior to his death, he had participated in G.M.'s bonus plan under which executive officers were awarded bonuses by G.M.'s Bonus and Salary Committee. G.M.'s practice was to determine bonuses in January for the previous year. Bonuses in excess of $2,000 were divided into installments, to be paid annually over the next several years. While the Committee had discretion to determine the recipients and the amounts of the bonuses, the decedent was, in fact, awarded a bonus for every year he was eligible. This was consistent with the Committee's general practice to award bonuses to all executive vice-presidents.

On March 2, 1970, three months after decedent's death, the Committee awarded its bonuses for 1969. Prior to his death, the Committee had made a tentative decision to award bonuses to every executive vice-president, including decedent. However, at the time of his death, the parties are in agreement that decedent had no rights to the 1969 bonus. When the 1969 bonuses were announced, the decedent was awarded a bonus consisting of 1786 shares of G.M. stock and $285,763 in cash (the post-mortem bonus). Since this bonus was in excess of $2,000, it was scheduled to be paid in several annual installments beginning in 1973.

About ten years prior to his death, decedent had established a revocable trust. Under the terms of his will, the residue of his estate was to pour over to the trust. Accordingly, the right to receive the post-mortem bonus was transferred from the estate to the trust. As each bonus installment became due, G.M. made payment to the trustee, as decedent's designated beneficiary.

On its income tax returns for the years 1970 through 1973, Taxpayer reported these bonus rights as income and valuated them at their present value at the time of distribution. When G.M. paid the installments, in January 1973, January 1974 and January 1975, Taxpayer did not claim the installments as income, except to the extent that their actual value exceeded the value originally claimed by appellant. The estate, meanwhile, claimed a deduction equal to the fair market value of each distribution of bonus rights made to the trustee. This deduction was made pursuant to 26 U.S.C. Sec. 661(a)(2), which allows estates to deduct "amounts properly paid or credited or required to be distributed." The estate did not declare any income when G.M. distributed the actual bonuses.

After an audit, the Commissioner determined deficiencies in Taxpayer's reported income for the 1973-75 period. The Commissioner claimed that, pursuant to 26 U.S.C. Sec. 691, each bonus installment received was income in respect of a decedent and had to be included in full in Taxpayer's income for the year in which it was received. Taxpayer should not have declared the bonus rights as income, only the actual bonuses, the Commissioner concluded.

Taxpayer petitioned the Tax Court for a redetermination of the deficiencies. The Tax Court held that, while decedent did not have a legal right to receive the post-mortem bonus at the time of his death, he nonetheless had a "right" to the bonus, within the meaning of Sec. 691, because it was substantially certain, as of the date of his death, that he would receive the bonus. Consequently, the court ruled, the bonus installments constituted income in respect of a decedent, pursuant to Sec. 691. The court also held that Secs. 661 and 662 do not apply to the distribution of the bonus rights because this would defeat the purpose underlying Sec. 691 and because, in any event, the more specific provisions of Sec. 691 control over the general provisions of Secs. 661 and 662. As a result, the court upheld the Commissioner's assessed deficiencies against Taxpayer who has appealed to this court.

II.

Taxpayer has attacked the Tax Court's opinion on two fronts. First, Taxpayer argues that the post-mortem bonus was not "income in respect of a decedent", within the meaning of section 691, because decedent did not have a legally enforceable right, at the time of his death, to receive this bonus. The statute's use of the phrase "in respect of a decedent" contemplates a legal right, Taxpayer urges, not simply a substantial likelihood, as the Commissioner and the Tax Court contend. Second, Taxpayer insists that the bonuses should properly be characterized as "amounts properly paid", within the meaning of Secs. 661(a)(2) and 662(a)(2), and that, pursuant to Treas.Reg. Sec. 1.661(a)-2(f), Taxpayer can treat the distribution of the right to receive the post-mortem as income to itself at the time of the distribution.

The Commissioner rejects these arguments. With regard to Taxpayer's first contention, the Commissioner insists that Sec. 691's use of the phrase "in respect of the decedent" does not indicate that the decedent must have had a legally enforceable right to receive the property. Rather, the Commissioner contends, property is "in respect of the decedent" as long as there is a substantial certainty that he will receive it. In the instant case, the Commissioner argues that there was substantial certainty, at the time of his death, that decedent would receive the bonus. Therefore, the Commissioner contends, the bonus constitutes income "in respect of the decedent", within the meaning of Sec. 691, and must be reported when received, not when the rights to the bonus payment are distributed. With regard to Taxpayer's contention that Secs. 661 and 662 govern this transaction, the Commissioner agrees that, in the absence of Sec. 691, Secs. 661 and 662 would indeed govern this transaction. The Commissioner notes that Sec. 691 specifically relates to income in respect of a decedent while Secs. 661 and 662 apply to the more general situation of property distributed by an estate. Since Sec. 691 specifically covers this transaction while Secs. 661 and 662 apply in a more general way, Sec. 691 should take precedence over Secs. 661 and 662, the Commissioner concludes. To hold otherwise, it is argued, would be to effectively write Sec. 691 out of the Code, since every distribution of a right to Sec. 691 income would be susceptible to treatment as a Sec. 662 distribution to a benficiary. ¹

III.

A. Applicability of Section 691

Recipients of "income in respect of a decedent" are required to report this income in their federal income tax returns, pursuant to the provisions of section 691(a)(1). ² In general, Sec. 691(a)(1) provides that all income in respect of a decedent, not includible in his last return or in a prior return, shall be included in the reported income, when received, of (1) his estate, (2) a person entitled to receive the amount directly from the decedent, or (3) a person entitled to receive the amount as a beneficiary through the decedent's estate. In the instant case, the post-mortem bonus was not includible in decedent's income, since he had died prior to the issuance of the bonus. If the post-mortem bonus qualifies as income in respect of a decedent, then Taxpayer, as the estate's beneficiary, would be required to include this amount, when received, in his reported income.

"Income in respect of a decedent" is not defined in the Code. However, the Service's regulations do provide a definition. 26 C.F.R. Sec. 1.691(a)-1(b) states that, in general, "the term 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...." More specifically, the term includes three categories of income: (1) all accrued income of the decedent who reported his income by use of the cash receipts and disbursements method; (2) income accrued solely by reason of the decedent's death in case of a decedent who reports his income by use of the accrued method of accounting; and (3) income to which the decedent had a contingent claim at the time of his death. It is not clear from this definition whether the term "entitled" means legally entitled, as appellant contends, or whether it simply means substantial likelihood of receiving the income, as the Commissioner argues.

Our...