Kramer v. United States

• Decision Date: 14 February 1969
• Docket Number: No. 285-66.,285-66.
• Parties: Carrie KRAMER and Julius Kramer, Executors of the Estate of Abraham Kramer, Deceased v. The UNITED STATES.
• Court: U.S. Claims Court

406 F.2d 1363 (1969)

Carrie KRAMER and Julius Kramer, Executors of the Estate of Abraham Kramer, Deceased v. The UNITED STATES.

No. 285-66.

United States Court of Claims.

February 14, 1969.

Richard Katcher, Cleveland, Ohio, attorney of record for plaintiffs. Herbert B. Levine, Cleveland, Ohio, of counsel.

Philip R. Miller, Washington, D. C., with whom was Asst. Atty. Gen., Mitchell Rogovin, for defendant.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, COLLINS, SKELTON and NICHOLS, Judges.

OPINION.

NICHOLS, Judge.

Plaintiffs, Carrie and Julius Kramer, are executors of the estate of Abraham Kramer. They are claiming an estate tax refund because they say the Commissioner of Internal Revenue (hereinafter referred to as the Commissioner) wrongfully included in the decedent's gross estate the value of the right of decedent's widow to receive weekly payments from his employer after his death. The parties have stipulated the facts. We agree with the plaintiffs.

In 1946, Abraham Kramer, the decedent, organized the Kramer Supply Company, a wholesale plumbing business. He originally owned 20.25 shares of the 250 shares of stock issued, and his son and son-in-law owned the remaining shares. Later, Mr. Kramer transferred his shares to a daughter and his son. Decedent, his wife and a son-in-law were on the first Board of Directors, and decedent was the first president of the Company. He remained in that position until November 15, 1956, when he entered into a written agreement with the Company. It recited that it was essential to the Company to have the benefit of Mr. Kramer's services during the forthcoming years. It provided in part:

(1) The Company does hereby employ the said Mr. Kramer as General Manager at an annual salary of $12,000.00 per year.

(2) In the event of illness and/or in the event that due to any circumstances which may make it impossible for Mr. Kramer to continue to act as General Manager, the Company agrees that he shall remain with it as an Advisor and Counsellor and to assist the officers and Employees in formulating plans and programs for the continuation of the business, for the remainder of his life. That during such services being rendered, he shall receive an annual salary of $12,000.00, payable in regular weekly installments.

(3) In the event of Mr. Kramer\'s decease, and while serving the Company either under the provisions of Paragraph (1) or (2), and in the event his wife, Carrie Kramer, shall survive him, then the Company agrees that she shall receive as compensation the sum of $150.00 per week, as long as she lives.

The agreement was subject to ratification by the Board of Directors and was approved December 1, 1956. The Board consisted of Mr. Kramer and the son and son-in-law above mentioned. Defendant says decedent contracted with himself. He did sign for the Company, but in his capacity as President, and, as noted, the agreement was subject to the approval of the Board of Directors. Mr. Kramer, an Ohio resident, died July 7, 1961, while serving as General Manager under paragraph 1 of the Agreement, and until four days before his death, he had worked in that position seven hours a day, five and one-half days a week. Decedent had no other arrangements or agreements with the Company concerning payments to him or his survivors at his death. Under Mr. Kramer's will his wife was bequeathed the residue of his estate "for the term of her natural life" and the remainder at her death was to be divided among his children.

After Mr. Kramer's death, his wife began receiving $150 per week from the Company pursuant to paragraph 3 of the agreement. Plaintiffs filed an estate tax return but did not include in decedent's gross estate the value of Mrs. Kramer's right to receive payments for the remainder of her life. Upon audit the commuted value of the widow's right to receive the payments was included in decedent's gross estate under Section 2039 of the Internal Revenue Code of 1954. (All references are to the 1954 Code unless otherwise specified.) Plaintiffs paid the deficiency, after which they filed a claim for refund of the tax attributable to the inclusion of the value of Mrs. Kramer's right to the payments. The refund was disallowed.

Mrs. Kramer's income tax returns for 1962 and 1963 included the $150 per week payments in her gross income. After plaintiffs received notice of the inclusion of the value of the payments in decedent's gross estate, Mrs. Kramer claimed an income tax refund under Section 691(c) which was allowed. Under Section 6501 the statute of limitations on Mrs. Kramer's 1962 and 1963 income tax years has now run against the defendant. The defendant urges that the commuted value of Mrs. Kramer's right to receive $150 per week was includable in decedent's gross estate under Section 2039. This section, captioned "Annuities", provides:

(a) GENERAL.

The gross estate shall include the value of an annuity or other payment receivable by any beneficiary by reason of surviving the decedent under any form of contract or agreement * * * if, under such contract or agreement, an annuity or other payment was payable to the decedent, or the decedent possessed the right to receive such annuity or payment, either alone or in conjunction with another for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death.

(b) AMOUNT INCLUDIBLE.

Subsection (a) shall apply to only such part of the value of the annuity or other payment receivable under such contract or agreement as is proportionate to that part of the purchase price therefor contributed by the decedent. For purposes of this section, any contribution by the decedent\'s employer or former employer to the purchase price of such contract or agreement * * * shall be considered to be contributed by the decedent if made by reason of his employment.

There have been very few cases that have dealt with Section 2039, but a reading of them indicates that all of the requirements of the section must be met for the payments such as those received by Mrs. Kramer to be includable in a decedent's gross estate. See Bahen v. United States, 305 F.2d 827, 158 Ct.Cl. 141, (1962). There must be an "annuity or other payment receivable by any beneficiary by reason of surviving the decedent" and the payments under subsection (b) must be by reason of the decedent's employment. We think that the $150 per week paid to Mrs. Kramer constituted "annuity or other payment" which was paid by reason of the decedent's employment, and under paragraph 3 of the agreement she had to survive Mr. Kramer to receive the payments.

An annuity or other payment also must have been payable to the decedent or he must have possessed the right to receive the payment. It is this requirement that is in issue in this case, and we do not believe that it has been met. Under the agreement the only payments Mr. Kramer had a right to receive were in the form of compensation for services rendered. There is nothing in the agreement or stipulated facts that leads us to believe anything different was intended. In Bahen, supra, the issue of whether or not salary was meant to be included in the definition of "other payment" was discussed. In that case, the decedent's beneficiary was to receive at his death an amount equal to three months' salary of the deceased. The Government had argued that "other payment" included salary, but we said:

* * * Since employees normally receive salary or wages, defendant\'s interpretation would effectively obliterate, for almost all employees, the express requirement in Section 2039 of "an annuity or other payment" to the decedent. (Bahen, 305 F.2d p. 834, p. 154 of 158 Ct.Cl.

In considering this same issue in Estate of Fusz, 46 T.C. 214 (1966), the Tax Court approved of our reasoning in Bahen and concluded that salary was not included in the meaning of "other payments" but that "the phrase `other payment' is qualitatively limited to post-employment benefits, which at the very least, are paid or payable during decedent's lifetime." Fusz, supra, p. 218.

The defendant argues that Mr. Kramer's agreement with the Company was really a retirement arrangement. We cannot agree. Because the parties chose to stipulate the facts in this case, we have a rather sparse record on which to base our decision, but we find in it nothing to indicate that this was a scheme to pension off Mr. Kramer while at the same time avoid the impact of Section 2039. The facts we do have indicate the opposite. Mr. Kramer worked seven hours a day, five and one-half days a week as General Manager of the Company which would hardly appear to be a retirement schedule. The defendant argues that as part of the retirement process, the decedent had even turned over stock control of the corporation. But the facts as stipulated show that decedent never did have stock control of the Company; the most he ever owned was 20.25 shares out of the 250 shares issued.

Under paragraph 2 of the agreement decedent was to serve as "Advisor and Counsellor" if it became impossible for him to perform the duties of General Manager. Defendant considers that paragraph a disability arrangement providing for contingent payments similar to the disability payments the decedent in the Bahen case had a contingent right to receive. We held in that case that contingent rights to receive payments that qualified as "other payments" came within the meaning of "possessed the right to receive" of Section 2039 and their value was includable in the decedent's gross estate. Bahen v. United States, supra, 305 F.2d pp. 830-832 pp. 147-150 of 158 Ct.Cl. Thus, the fact that Mr. Kramer died while serving under paragraph 1 would not affect the significance of paragraph 2, even though it never became operative, were we to find those payments qualified as "other payments" which he possessed the right to receive. Paragraph 2 of the agreement provided that pla...