King v. Comm'r of Internal Revenue (In re Estate of King)

• Decision Date: 26 August 1953
• Docket Number: Docket No. 37696.
• Citation: 20 T.C. 930
• Parties: ESTATE OF ALBERT B. KING, DECEASED, EDITH F. KING, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

20 T.C. 930

ESTATE OF ALBERT B. KING, DECEASED, EDITH F. KING, EXECUTRIX, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 37696.

Tax Court of the United States.

Promulgated August 26, 1953.

Decedent's employer, under the terms of its established bonus plan, awarded him substantial bonuses in 1946, 1947, and 1948. Part of the 1948 award was required to be invested in capital stock of the employer. One-fourth of each award was paid immediately, the balance to be delivered in three equal annual installments. The plan vested the rights of a stockholder in decedent but provided for forfeiture of the undelivered portions of the awards in the event he left the service of the company. At the time of decedent's death, portions of each award remained undelivered and were paid by the employer to decedent's executrix as provided by the plan. Held, the undelivered portions of the bonus awards were includible in decedent's gross estate, under section 811(a) of the Internal Revenue Code, as property in which decedent had an interest at the time of his death. Floyd F. Toomey, Esq., and John P. Lipscomb, Jr., Esq., for the petitioner.

E. M. Woolf, Esq., for the respondent.

This proceeding is brought to test the correctness of respondent's action in determining a deficiency of $1,930.70 in the estate tax of the decedent. The sole issue herein is whether the amount of $37,483.25 payable to decedent's estate under the bonus plan of E. I. du Pont de Nemours & Company, Inc., is includible in the gross estate of decedent. The facts on which decision is sought were stipulated by the parties.

FINDINGS OF FACT.

At all times material herein and until his death on September 9, 1948, Albert B. King (hereinafter referred to as the decedent) was a citizen of the United States and a resident of Wilmington, Delaware.

Under his will dated March 12, 1921, decedent left his entire estate to his wife, Edith F. King. Under the laws of the State of Delaware, however, two after-born children were each entitled to take one-third of two-thirds of decedent's personal property. Petitioner is the duly appointed and qualified executrix of the decedent's estate and resides in Wilmington, Delaware. The estate tax return involved herein was filed with the collector of internal revenue for the district of Delaware at Wilmington, Delaware. The petitioner did not elect to have the value of the gross estate of the decedent valued as of a date subsequent to the time of decedent's death.

For some years prior to his death and at the time of his death, decedent was an employee of E. I. du Pont de Nemours & Company, Inc., a corporation (hereinafter referred to as the Company). At all times material herein, the Company maintained a bonus plan under which and subject to the conditions of which awards might be made to employees of the Company who had made unusual contributions to its success. The awards were of two types: Class A and Class B. Only the latter type of award is involved in this proceeding. Class B awards might, in the language of the bonus plan—

be granted to those who have contributed most in a general way to the Company's success by their ability, efficiency and loyalty, including those who have proven themselves qualified to occupy important managerial posts and to succeed to higher positions.

In the discretion of the bonus and salary committee, under article III of the bonus plan, awards could be made ‘in common stock acquired by the Company, or in cash to be invested in new common stock issued directly to the beneficiaries, or in the form of cash,‘ or in any combination thereof.

Article VII of the bonus plan provided that:

In the case of a cash award to be invested in stock of the Company the Bonus Custodian shall advise the beneficiary that such award is conditioned upon its investment in common stock of this Company and shall procure from the beneficiary a signed subscription for the number of shares available to him at the price fixed therefor; such subscription agreement to provide that the stock is to be issued in the name of the beneficiary and is to be subject to the provisions of the Company's Bonus Plan.

Payment for newly issued stock was to be made ‘by the beneficiaries through the Bonus Custodian from cash bonuses.‘

Any award in cash to be invested in common stock was subject to the following restrictions imposed under article VIII of the bonus plan:

The Bonus Custodian shall procure from each beneficiary an irrevocable power of attorney with respect to any shares not immediately deliverable to the beneficiary hereunder, which power shall provide that—

(a) The beneficiary will not sell, assign or pledge any of such stock remaining in the custody of the Bonus Custodian;

(b) The Bonus Custodian shall receive and hold any stock dividend declared on the stock in his custody, same to be released to the beneficiary as and when the stock in the custody of the Bonus Custodian is released; and

(c) In case the beneficiary leaves the service of the Company, or is dismissed, stock in the custody of the Bonus Custodian may be sold and settlement made as hereinafter provided in Article XI.

Under the bonus plan, the beneficiary of an award of stock or cash to be invested in stock was given the following rights with respect thereto:

An award in stock of the Company, or the investment of a cash award in stock of the Company, shall vest in the beneficiary all the rights of a stockholder in such stock, subject (1) to the right of the Bonus Custodian to possession of certificates evidencing a portion of the stock as herein provided, and (2) to the right of the Company to have stock in the custody of the Bonus Custodian sold and the proceeds transferred to the Company in the case of Class ‘A‘ awards, and to the Class ‘B‘ Bonus Fund in the case of Class ‘B‘ awards, as provided in Article XI hereof, in case the beneficiary leaves the service of the Company.

The bonus plan contained the following provisions material herein with respect to delivery or payment of any award:

3. Except as provided in paragraph 1 and 2 of this Article, when any bonus in the form of stock or in the form of cash to be invested in stock has been awarded, a certificate for one-fourth of the shares representing such award or investment, free from all restrictions, shall be delivered to the beneficiary immediately, and certificates for the balance shall be delivered to the Bonus Custodian who hold the same for release to the beneficiary as follows:

1/4 of the total number of shares shall be released after the end of the year in which the award is made;

1/4 of the total number of shares shall be released after one year from the end of the year in which the award is made;

1/4 of the total number of shares shall be released after two years from the end of the year in which the award is made;

provided, however, that should such beneficiary leave the service of the Company, settlement will be made as hereinafter provided.

4. No fractional share will be delivered or released hereunder.

5. Except as provided in paragraphs 1 and 2 of this Article, when any bonus in the form of cash not to be invested in stock has been awarded, one-fourth of such award shall be paid to the beneficiary immediately, and the balance of such award shall be paid to the beneficiary in three equal annual installments, the first installment to be payable after the end of the year in which the award is made; provided, however, that should such beneficiary leave the service of the Company, settlement will be made as hereinafter provided.

Any beneficiary of an award payable in installments was subject to the following provisions of the bonus plan relating to forfeiture:

1. The Bonus Custodian shall open an account with each beneficiary to whom a bonus is to be delivered in accordance with Article X, paragraph 3 or 5, charging him with the total number of shares or cash in his award or investment, crediting him immediately with one-quarter thereof, and crediting him, with respect to the remaining three-quarters, at the rate of 1/48th of such total number of shares or cash, as the case may be, for each month of service beginning with January of the year in which the award was made.

2. If a beneficiary leaves the service of the Company, or is dismissed from such service, such number of whole shares as are represented at the time in the debit balance of his account, plus any whole share in which the beneficiary has a fractional interest, may be sold at the...