Estate of Porter v. CIR

• Decision Date: 10 May 1971
• Docket Number: No. 71-1001.,71-1001.
• Citation: 442 F.2d 915
• Parties: ESTATE of Bernard L. PORTER, Deceased, et al., Petitioners, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent, Appellee.
• Court: U.S. Court of Appeals — First Circuit

442 F.2d 915 (1971) ESTATE of Bernard L. PORTER, Deceased, et al., Petitioners, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent, Appellee.

No. 71-1001.

United States Court of Appeals, First Circuit.

May 10, 1971.

J. Robert Seder, Worcester, Mass., with whom Seder & Seder, Worcester, Mass., was on brief, for appellants.

William K. Hogan, Atty., Tax Division, Dept. of Justice, with whom Johnnie M. Walters, Asst. Atty. Gen., Meyer Rothwacks and Elmer J. Kelsey, Attys., Tax Division, Dept. of Justice, Washington, D. C., were on brief, for appellee.

Before ALDRICH, Chief Judge, McENTEE and COFFIN, Circuit Judges.

McENTEE, Circuit Judge.

This case involves a deficiency of $11,612.34 assessed by the Tax Court against the estate of Bernard L. Porter on the value of certain death benefits provided by the decedent's employers to his widow. The decedent, a rug manufacturer, was in business with his two brothers. The brothers each owned one third of the stock of Oxford Mills, Inc., and Quabbin Spinners, Inc., and these two corporations owned all the stock of Fiber Processing Co., Inc. Also, the brothers constituted the board of directors of all three corporations, and each was employed by all three.

On January 29, 1964, the three corporations entered into identical agreements with each of the brothers. These agreements provided that, in order for the company "to assure itself of the continued services, advice, and experience of the Employee" and "as an inducement to the Employee to remain in the Company's employ, * * * in the event of the Employee's death while in the employ of the Company," the latter would pay to his widow an amount equal to twice the compensation he had received during his final year of employment. The payments were to be made in monthly installments over a period of ten years. On January 30, the day after the agreements were executed, Porter entered the hospital to undergo gall bladder surgery. He died on February 16, having been ill for approximately four months prior to death. The companies made the required payments to his widow. The estate paid the deficiency assessed by the Commissioner, and petitioners brought this suit in the Tax Court. The Tax Court held that the death benefits were taxable as a gift made in contemplation of death under 26 U.S.C. § 2035, 54 T.C. 1066 (1970),¹ and petitioners appealed.

The parties agree that the death benefits in question are not taxable under § 2039 — the provision under which most employee death benefits are now taxed — since in the instant case the decedent had no right to receive any part of those benefits during his life. However, the legislative history accompanying the enactment of § 2039 in 1954 indicates that this provision was not intended to preclude the application of other estate tax provisions to employee death benefits not covered by it. 1954 U.S.Code Cong. & Admin.News, pp. 4459, 5116. In order to determine the appropriate estate tax treatment of such benefits it is relevant to consider the treatment of employee death benefits generally under pre-1954 law. In this opinion we first consider petitioners' contention that the death benefits in question do not constitute taxable property under the Code. We shall then consider exactly which provisions apply.

Was an Interest in Property Created?

Petitioners' principal argument is that none of the provisions of the estate tax law can apply because no interest in property was created by the death benefits agreements until after Porter's death.² They argue that, since the benefits were payable only in the event that Porter was employed at the time of his death and since his employment was terminable at will by the companies at any time,³ the chances that the benefits would ever be paid were at most "a mere expectancy" during his life. For this argument they rely principally on Dimock v. Corwin, 19 F.Supp. 56 (E.D.N.Y. 1937), aff'd on other grounds, 99 F.2d 799 (2d Cir. 1938), aff'd sub nom. United States v. Jacobs, 306 U.S. 363, 59 S. Ct. 551, 83 L.Ed. 763 (1939), and cases that have followed it. Dimock dealt with benefits paid to a widow under a company-wide employee death benefit plan. The court held that, because the company had retained the right to revoke or modify the benefits at any time, the decedent possessed nothing more than "the right to render it possible for his wife to receive a grant from the company, and that this did not constitute property" under the estate tax law. 19 F.Supp. at 60. In almost all of the cases that have followed Dimock, either the company has expressly reserved the right to revoke or modify the plan, Molter v. United States, 146 F.Supp. 497, 500 (E.D.N.Y.1956); Estate of Barr v. CIR, 40 T.C. 227, 232 (1963); or the court has found as a matter of fact that the benefit was a mere gratuity bestowed by the employer, for which the employee gave no consideration, Hanner v. Glenn, 111 F.Supp. 52, 57 (W.D.Ky.1953), aff'd, 212 F.2d 483 (6th Cir. 1954); Estate of Saxton v. CIR, 12 T.C. 569, 575 (1949). A gratuity would pass directly from the company to the decedent's widow; it would not be includable in the employee's gross estate since it would in no sense have passed to his wife from him.⁴

Other cases dealing with pre-1954 law have found employee death benefits to be subject to estate taxation.⁵ Estate of Garber v. CIR, 271 F.2d 97 (3d Cir. 1959), dealt with a pension plan, the funds from which were received by the employee during his life, and after death by a beneficiary that had been designated by him. The court held that the funds received by the beneficiaries were includable in Garber's gross estate under § 811(a) of the Internal Revenue Code of 1939 (the predecessor of § 2033), and laid down the general rule that "death benefits derived from funds which represent deferred compensation to the deceased, or granted under plans which explicitly give the decedent direct contractual rights in the funds" are includable in the decedent's gross estate. 271 F.2d at 101. Accord, Rosenberg v. United States, 309 F.2d 724 (7th Cir. 1962); Goodman v. Granger, 243 F.2d 264 (3d Cir.), cert. denied, 355 U.S. 835, 78 S.Ct. 57, 2 L.Ed.2d 47 (1957); Estate of Wolf v. CIR, 29 T.C. 441, 447 (1957), rev'd on other grounds, 264 F.2d 82 (3d Cir. 1959).

The death benefits in this case appear to represent "deferred compensation" in the sense that they were to be paid in consideration of Porter's future services. There was further consideration in that, by the reciprocal promise that the companies in which he owned a substantial interest would provide for his brothers' widows, he incurred a detriment. As noted, petitioners take the position that, since Porter could be discharged at any time, the likelihood that his wife would ever actually receive any of the benefits was as speculative as in Dimock, supra. But petitioners conceded at oral argument that under Massachusetts law the companies could not have discharged him merely to avoid their obligation under the agreements, and the relevant cases support that conclusion. Patton v. Babson's Statistical Organization, Inc., 259 Mass. 424, 427, 156 N.E. 534, 535 (1927); cf. Askinas v. Westinghouse Electric Corp., 330 Mass. 103, 111 N.E.2d 740 (1953); Berry v. Donovan, 188 Mass. 353, 74 N.E. 603 (1905). Far from being revocable at will by the company as in Dimock, the agreements expressly provided that they could "be terminated, altered or amended only with the written consent of all of the parties." (Emphasis ours.) Furthermore, as co-owner of all three corporations, Porter was unlikely to be laid off or separated from the company against his will.

We think that the petitioners are correct, however, in their contention that these agreements were probably unenforceable under Massachusetts law. As a third-party beneficiary, Porter's widow could not have sued to enforce them, Saunders v. Saunders, 154 Mass. 337, 28 N.E. 270 (1891); Mellen v. Whipple, 67 Mass. (1 Gray) 317 (1854); and the cases do not support the Tax Court's conclusion that she came under any of the exceptions to the general rule.⁶ The Tax Court ruled alternatively that the agreements were enforceable by the representatives of Porter's estate since it was expressly provided that they "shall be binding upon and inure to the benefit of the parties, their * * * executors, administrators, or other legal representatives." However, we do not understand in what sense these agreements could ever have inured to the benefit of Porter's estate. The death benefits were made payable to Porter's widow or his children or their issue but, in the event that neither widow nor children nor issue survived, no further payments were to be made. Since the estate could not have benefited in any way from these agreements, we doubt that it could have sued to enforce them. Cf. Comstock v. Bowles, 295 Mass. 250, 261, 3 N.E.2d 817, 824 (1936).

Nevertheless, we do not find the fact that the agreements were probably not enforceable under Massachusetts law conclusive. Enforceability is important principally as an indication of the likelihood that the agreements will be honored in fact. In the instant case the estate could presumably have sued for breach of contract to recover the funds for its own benefit, had the agreements not been honored. See Mass.Gen.Laws ch. 228, § 1; Hunt v. Whitney, 4 Mass. 620, 621 (1808); cf. Chamberlain v. Henry, 263 Mass. 63, 160 N.E. 317 (1928). Legal pressure could therefore have been exerted on the companies to honor the agreements. Furthermore, realistically speaking, it is most unlikely that reciprocal agreements among three brothers who have been associated together in business for approximately thirty years would not be honored after their death.

Taxability under the Code

The death benefits do not appear to be taxable under 26 U.S.C. § 2033 since Porter had parted with any right to receive payments prior to the "time of his death."⁷ See the Tax Court op...