Estate of Carter v. CIR, 40

• Decision Date: 14 December 1971
• Docket Number: Docket 71-1201.,No. 40,40
• Citation: 453 F.2d 61
• Parties: ESTATE of Sydney J. CARTER, Deceased (a/k/a Sydney J. Canter), et al., Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
• Court: U.S. Court of Appeals — Second Circuit

453 F.2d 61 (1971) ESTATE of Sydney J. CARTER, Deceased (a/k/a Sydney J. Canter), et al., Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

No. 40, Docket 71-1201.

United States Court of Appeals, Second Circuit.

Argued November 9, 1971.

Decided December 14, 1971.

Michael S. Feinman, New York City, Stuart M. Berkman, New York City, of counsel, for appellants.

William M. Brown, Jr., Washington, D. C. (Meyer Rothwacks, Elmer J. Kelsey, Attys., Tax Division, Department of Justice, Washington, D. C., and Johnnie M. Walters, Asst. Atty. Gen., of counsel), for appellee.

Before FRIENDLY, Chief Judge, FEINBERG, Circuit Judge, and DAVIS, Associate Judge.^*

FRIENDLY, Chief Judge:

The taxpayers' appeal from a judgment of the Tax Court, 29 CCH Tax Ct.Mem. 1407 (1970), raises the frequently litigated question whether payments by an employer to the widow of a deceased employee constituted compensation to the latter, includible as gross income under I.R.C. § 61(a), or a gift to the survivor, excludible under § 102(a).

Sydney J. Carter had been employed by the New York City financial house of Salomon Bros. & Hutzler ("Salomon Bros.") for 38 years when he died on March 1, 1960. At that time he was working under a yearly employment contract entitling him to an annual salary of $15,000 and, if he was still in the firm's employ on September 30, 1960, the end of its fiscal year, to an additional amount equal to .55% of the firm's net profits. During his employment he had required hospitalization more than 20 times and had undergone seven major operations. On many of these occasions partners of Salomon Bros. called Mrs. Carter¹ to offer financial assistance; the Carters declined, preferring to manage on their own. Most of the Salomon Bros. partners attended Mr. Carter's funeral, two having flown in from Chicago despite a blizzard. Some of the partners later suggested that the Carters' son come to work for the firm, which he did for a while.

In 1960 Salomon Bros. was managed by an administrative committee, consisting of a number of the general partners. At a meeting of this committee held shortly after Mr. Carter's death, it was decided to pay Mrs. Carter what her husband would have earned under his contract if he had lived until the end of the firm's fiscal year. These payments amounted to $60,130.84, of which $8,653.80 (paid in 15 biweekly checks of $576.92) constituted what would have been Mr. Carter's salary and $51,477.04 was what would have been his .55% share in the firm's profits.

While no minutes were kept of the administrative committee meeting at which the payments to Mrs. Carter were authorized, two members of the committee testified before the Tax Court. They agreed that at the time of Mr. Carter's death, Salomon Bros. had no established plan or policy with respect to payments to the survivors of valued employees; indeed, Mr. Carter was the first "contract employee" to have died. Both attested to the affection and esteem in which Mr. Carter was held. One, Mr. William J. Salomon, now the managing partner, who was called by the Commissioner, testified that he felt sympathy for the widow, that this did not enter into the particular decision since "we would be sympathetic to any widow," but that, on the other hand, he doubted whether the payment would have been made if Mr. Carter had not been survived by a wife and son. He said further that, as was fairly obvious, Mr. Carter's past services were a factor in arriving at the decision. He also testified that the matter had been referred to counsel who had advised that the firm would be permitted to make the payments "and it would be treated in the same manner as if he the employee were still alive. . . ." Since the opinion of counsel was not produced, there is no basis for determining whether this hinged on the payments being so treated that they would constitute compensation.

Salomon Bros. did not file a withholding return (Form W-2), or withhold any income or social security taxes from the payments to Mrs. Carter. It did file an information return (Form 1099) describing the payments representing what would have been Carter's percentage share of the profits as "salaries, fees, commissions or other compensation" but, inconsistently, did not file such a form with respect to the payments representing what would have been his fixed salary.²

At the end of 1960 or the beginning of 1961, the accountants who were preparing the joint income tax return of Mr. and Mrs. Carter for 1960 had a meeting at Salomon Bros. to determine how to report the payments above described. Salomon Bros. was represented by a partner, Clement J. Gaertner, Sr., who had died before the hearing in the Tax Court. Mr. Gaertner was not a member of the administrative committee but, in Mr. Salomon's words, "was the equivalent of the man in charge of back office and payments and the details, and he would talk to the lawyers and the accountants and it would be carried on from there."³ Mrs. Carter's accountant testified that Mr. Gaertner had stated "that the payments were intended to be a gift to Mrs. Carter and they didn't know the mechanical method by which to proceed to make the gift effective." One of the accountants prepared a draft of a letter. Under date of February 1, 1961, Salomon Bros. sent the accountants a letter which we quote in the margin.⁴ Mrs. Carter's accountant testified that Mr. Gaertner had said the firm would not deduct the payments as wages; since the information return of the partnership income is not in the record before us and the Commissioner has not claimed that the payments were deducted as compensation, we assume this intention was carried out.⁵

The joint return for 1960 filed by Mrs. Carter as executrix and for herself did not report as income the payments of $60,130.84, although it did report as capital gain a payment of $52,337.68, less the deduction of $5,000 permitted by I.R.C. § 101(b)(2) (A), from the Trustees of the Salomon Bros. Profit Sharing Plan, which represented the amounts accumulated for Sydney Carter's benefit during his years of service. The Commissioner assessed a deficiency for failure to include the former amount; Mrs. Carter petitioned the Tax Court to reconsider this; that court sustained the Commissioner; and this appeal followed. We reverse.

The Commissioner expectably relies on C. I. R. v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960), which included Stanton v. United States, and United States v. Kaiser, 363 U.S. 299, 80 S.Ct. 1204, 4 L.Ed.2d 1233 (1960). We believe he reads somewhat more into those decisions than they held. Apart from the fact that none of the three cases involved payments to a survivor of a deceased employee, we do not understand the Court's opinion to mean that every trier of the facts was to be free for all future time to disregard guidelines that other trial and appellate courts had developed concerning the weight to be given to recurring "relevant factual elements, with their various combinations," 363 U.S. at 289, see also p. 290, 80 S.Ct. at 1199. In refusing to adopt the Government's proposal that any business reason for a payment would prevent it from being considered a gift, see 363 U.S. at 284 n. 6 and 287, 80 S.Ct. at 1196 and 1197, and requiring inquiry in each case into "the dominant reason that explains his the payor's action in making the transfer," the Court scarcely intended to sanction disregard of the teaching of one of its greatest members:

It will not do to decide the same question one way between one set of litigants and the opposite way between another.

Cardozo, The Nature of the Judicial Process 33 (1921). See also H.L.A. Hart, The Concept of Law 155-62 (1961).

When the Supreme Court decided Duberstein, Stanton and Kaiser, the Tax Court had already gone a considerable way toward structuring its position with respect to the taxable status of payments to the survivor of a deceased employee. In the often cited case of Estate of Hellstrom v. C. I. R., 24 T.C. 916 (1955), it held that payments to the widow of the president of a corporation of the amount the president would have received in salary if he had lived out the year constituted a gift. The court specifically gave no weight to the facts that the corporation took a deduction or that the gift was a function of the deceased's salary. It found the controlling facts to be that (1) the gift was made to the widow, rather than to the estate; (2) there was no obligation on the part of the corporation to make any further payments to the deceased; (3) the widow had never worked for the corporation; (4) the corporation received no economic benefit; and (5) the deceased had been fully compensated for his services. Applying a test of principal motive and thus anticipating Duberstein, the court found this to be a desire of the corporation to do an act of kindness for the widow. In Estate of Foote v. C. I. R., 28 T.C. 547 (1957), the Tax Court followed Hellstrom and found a gift in payments to the widow of the amount which her husband, a former officer of the corporation, would have received in salary if he had lived out the year. All the factors relied upon in Hellstrom were present, except that the gift was made to the estate of the deceased, rather than directly to the widow. There was an additional finding that the corporation had no policy of making such payments. In Estate of Luntz v. C. I. R., 29 T.C. 647 (1958), the Tax Court held that payments to the widow of a sum equivalent to two years salary of her husband, a former president were a gift, despite the fact that at the same time the corporation also provided for the wives of two living officers at the time of their death. In finding that the payments were a gift, the Tax Court repeated the five factors noted in Hellstrom.

Despite the fact that Duberstein had approved the substantive test applied in Hellstrom and Luntz, the Tax Court took an abrupt swerve in Estate of Pierpont...