Evans v. Comm'r of Internal Revenue

• Decision Date: 27 December 1962
• Docket Number: Docket No. 86161.
• Parties: LUCILE MC CREA EVANS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

39 T.C. 570

LUCILE MC CREA EVANS, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 86161.

Tax Court of the United States.

Filed December 27, 1962.

W. W. Berry, Esq., for the petitioner.

Robert B. Milsten, Esq., for the respondent.

Held, that, under the circumstances here involved, payments received by the petitioner from a corporation after the death of her husband, who had been president of the corporation, were not gifts within the meaning of section 102(a) of the Internal Revenue Code of 1954, but constituted ordinary income to her under section 61(a) of the Code, subject to an exclusion of $5,000 under section 101(b) of the Code.

ATKINS, Judge:

The respondent determined deficiencies in income tax for the calendar years 1955, 1956, and 1957 in the respective amounts of $3,392.79, $17,239.67, and $9,398.47.

The sole issue presented is whether payments in the amounts of $12,500 in 1955, $30,000 in 1956, and $17,500 in 1957 received by the petitioner from the former corporate employer of her deceased husband, constituted gifts excludable from her gross income under section 102(a) of the Internal Revenue Code of 1954 or are taxable as ordinary income under section 61(a) of the Code, subject to an exclusion of $5,000 pursuant to section 101(b) of the Code.

FINDINGS OF FACT.

Some of the facts have been stipulated and are incorporated herein by this reference.

The petitioner is an individual, the surviving spouse of Silliman Evans, Sr., hereinafter referred to as ‘the decedent,‘ residing in Davidson County, Tenn. She filed her income tax returns for the taxable years 1955, 1956, and 1957 with the district director of internal revenue at Nashville, Tenn.

At the time of his death on June 26, 1955, the decedent was the owner of 57.7 percent of the stock of Tennessean Newspapers, Inc., hereinafter referred to as the corporation, which publishes a morning and Sunday newspaper known as the Nashville Tennessean. At that time and at all times material herein the petitioner owned 4 percent of the stock of the corporation.¹

The decedent became connected with the corporation in 1937 and had been its president at least since 1948. At the time of his death he was its president and publisher, with a salary of $61,215. Prior to her husband's death the petitioner had never been employed by the corporation and was not a director of the corporation.

At the time of the decedent's death he and the petitioner had two sons, Silliman Evans, Jr., who was employed by the corporation as assistant publisher, and Amon Carter Evans.

At the time of the decedent's death the directors of the corporation were the decedent, both of his sons, Russell L. Speights, Mrs. John M. Branham, Coleman A. Harwell, and one other unidentified person.

By his will, which was executed on October 3, 1953, the decedent appointed a bank and an individual as executors of his estate and as trustees of two trusts created by his will and designated as ‘Trust A’ and ‘Trust B.’ By his will the decedent gave, devised, and bequeathed to the testamentary trustees all his residuary estate, consisting of his stock in the corporation and substantially all of his property other than his personal effects, to be placed in the two trusts. It was provided that each trust should receive one-half of the property in order that Trust A might qualify for the maximum marital deduction under the Federal estate tax laws. It was provided that the petitioner should receive the entire net income from Trust A for her life and she was given the exclusive power, exercisable by will, to appoint the entire corpus of Trust A in favor of her estate or others as she might elect.

In his will the decedent directed that his executors immediately arrange for the election of the petitioner as president of the corporation at a salary of $10,000 per year.² He also directed that, commencing at the time of his death, the petitioner should receive throughout her life, so long as she remained unmarried, a total amount of $15,000 per year, to be made up of salary and the remainder by payments by the trustees from income of the trusts, or from borrowing, if necessary; that the trustees should continue her as president of the corporation at such salary until such time as in their opinion they could pay her $15,000 per year from income of the trusts, without encroachment upon corpus; and that if the petitioner should cease to be employed as president of the corporation, for any reason other than her refusal to serve as president, the trustees might encroach upon the principal of the trusts in order to continue the payments of $15,000 to her.

In his will the decedent expressed the wish that his trustees and the board of directors should employ his son, Silliman, Jr., as publisher of the corporation, and that his son, Amon, upon the completion of his education, should be employed by the corporation and assigned such duties as the trustees might approve. It was provided that the petitioner if living, or otherwise the trustees, should determine the amount, in addition to the salaries the sons might receive, which might be necessary to properly maintain them, and that the trustees should pay such amounts to the sons from the trust estate; and that the minimum amount to be received by each son should be $400 per month, including salary received. It was provided that decedent's son Amon, who was 20 years old at the time of the execution of the will, should receive an amount, not exceeding $3,000 per year, during the period he was completing his education.

The will provided that any unused income of Trust B should be added to corpus, that upon the death or remarriage of the petitioner the corpus of Trust B should be divided into two equal parts, one for each son, and that each son should receive the distribution of his share of corpus upon his attaining the age of 35 years, or upon the death or remarriage of the petitioner, whichever should occur later.

The decedent in his directed the trustees to hold the stock of the corporation unless they should determine that to continue holding it might result in a substantial loss to the trust estate; that if they should determine that a sale of the stock should be made they should consult the top officials of the corporation and the petitioner; that the petitioner in turn should consult other designated individuals who were nonresident publishers; that the trustees could then sell the stock by and with the consent of the petitioner; and that if she should withhold her consent, the trustees could sell the stock but only with the unanimous approval of all the consultants.

The decedent directed that the trustees, before voting for directors of the corporation, should consult with the petitioner and the sons and with at least three other top employees of the corporation, and vote for directors who were approved by both the trustees and by the petitioner and the sons, and who would, among other things, consult with the petitioner as to policies of the paper and its personnel and consider and respect her wishes and desires insofar as compatible with good business management; and that the petitioner should be a director of the corporation as long as she was capable of acting and willing to serve. He also expressed the wish that his sons should be members of the board of directors so long as they were able and willing to serve and that both they and the petitioner should be freely consulted regarding the business policy of the paper.

The will expressly authorized and empowered a majority of the adult beneficiaries of Trust A and Trust B to remove the trustees of the trusts, and to appoint a successor corporate trustee (which should be a bank or trust company having capital or surplus and undivided profits of at least $1,000,000). They were also empowered to appoint a successor individual trustee, but it was provided that his appointment should be confirmed by a court of competent jurisdiction, and it was provided that the individual appointed should be satisfactory to both the court and to a majority of such adult beneficiaries.

The stockholders of the corporation, at a meeting held on July 29, 1955, elected the petitioner and John H.Nye as new directors of the corporation and reelected as directors Silliman Evans, Jr., Amon Evans, Russell L. Speights, ³ Mrs. Branham, and Coleman A. Harwell. Immediately following the stockholders meeting on July 29, 1955, all seven members of the board of directors met and elected the petitioner president of the corporation with salary of $10,000 per annum,⁴ Silliman Evans, Jr., as publisher with salary of $30,000 per year, and Speights as secretary and treasurer. At such meeting a salary of $3,600 per annum was fixed for Amon Carter Evans as vice president. The minutes of the directors meeting show that thereupon the following transpired:

The Treasurer then stated that under certain rulings and Court decisions hereinafter cited, the widow of a deceased officer of a corporation may receive gratuitous payments equal to the husband's salary for a limited period, usually not to exceed two years, and that such payments in the nature of gifts are deductible as business expenses in the corporation's return (Louise K. April, 13 T.C. 707; Alice M. McFarlane, 19 T.C. 9; Bogardus v. Commissioner, 302 U.S. 34). Based thereon, the following resolution was unanimously adopted:

BE IT RESOLVED, That this corporation shall pay to Mrs. Lucile McCrea Evans, widow of Silliman Evans, President and Publisher of the Nashville Tennessean, the sum of $2,500.00 per month beginning in August, 1955 for a period of not to exceed two years. The payments are to be made voluntarily without any prior obligations to make such payments and without any benefits or services expected therefrom, it being understood that the husband was fully paid for his services during his life-time. The foregoing payments to the widow are intended as gifts to...