Peterson's Estate v. C. I. R.

• Decision Date: 17 December 1981
• Docket Number: No. 81-1019,81-1019
• Citation: 667 F.2d 675
• Parties: 82-1 USTC P 9110 ESTATE OF Charley W. PETERSON, Deceased, Della E. Peterson and Charles R. Peterson, Co-Executors, Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 675

667 F.2d 675

82-1 USTC P 9110

ESTATE OF Charley W. PETERSON, Deceased, Della E. Peterson

and Charles R. Peterson, Co-Executors, Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Appellant.

No. 81-1019.

United States Court of Appeals,

Eighth Circuit.

Submitted Sept. 16, 1981.

Decided Dec. 17, 1981.

John F. Murray, Acting Asst. Atty. Gen., Michael L. Paup, Daniel F. Ross (argued), James F. Miller, Attys., Tax Div., Dept. of Justice, Washington, D. C., for appellant.

John E. North (argued), Jeffrey J. Pirruccello, McGrath, North, O'Malley & Kratz, P. C., Omaha, Neb., for appellees.

Before STEPHENSON, Circuit Judge, GIBSON, Senior Circuit Judge, and McMILLIAN, Circuit Judge.

McMILLIAN, Circuit Judge.

This is an appeal from the decision of the Tax Court holding that the sale proceeds received by the estate of Charley W. Peterson from the sale of 2,398 calves did not constitute "income in respect of a decedent" under § 691(a)(1) of the Internal Revenue Code ¹ (all statutory references are to the Code). Estate of Peterson v. Commissioner, 74 T.C. 630 (1980). Five of the Tax Court judges, however, concurred only in the result because the Commissioner never sought to allocate the sale proceeds between those calves which were "deliverable" and not "deliverable" on the date of the decedent's death. Id. at 646 n.1 (Simpson, J., concurring). For reversal the Commissioner now argues that because two-thirds of the calves were "deliverable" on the date of the decedent's death, the sale proceeds attributable to those calves should be considered "income in respect of a decedent." We affirm the decision of the Tax Court.

The facts are not disputed. The following statement of facts is based upon the Tax Court opinion. The decedent, Charley W. Peterson, was in the business of raising and selling cattle. On July 11, 1972, he entered into a "livestock sales contract" with the Max Rosenstock Co., through its agent R.E. Brickley. Under the terms of this contract, the decedent was to raise and sell to the Max Rosenstock Co. "approximately 3,300 calves" at $0.49 per pound, with the date of delivery to be designated by the decedent upon five days notice. One group of calves (the Brown County calves) was to be delivered no later than November 1, 1972; the other group (the Holt County calves) was to be delivered no later than December 15, 1972. The calves were to be from three to eleven months old and in "merchantable condition" when delivered. As provided in the contract, the Max Rosenstock Co. paid $46,500 in "earnest money" to the decedent on July 13, 1972. The risk of loss was on the decedent until delivery.

The decedent did not designate a delivery date or deliver any calves by the November 1 delivery date. The record contains no reason why the decedent did not designate a delivery date or deliver the Brown County calves on or before the November 1, 1972, delivery date specified in the contract. The decedent died on November 9, 1972. The estate (the taxpayer) assumed responsibility for the calves, designated several December delivery dates, and delivered a total of 2,929 calves, 2,398 owned by the estate and 531 owned by the decedent's sons, Willis Peterson and Charles R. Peterson. The calves were accepted by the Max Rosenstock Co. As found by the Tax Court, approximately two-thirds of the calves were in a "deliverable" condition as of the date of the decedent's death. The remaining calves were not "deliverable" on that date because they were too young.

The estate reported the sale of the calves on its fiduciary income tax return and computed the gain from the sale by subtracting the fair market value of the calves on the date of the decedent's death from the sale proceeds. The Commissioner, however, determined that the gain from the sale constituted "income in respect of a decedent" under § 691(a)(1) and recomputed the estate's gain on the sale by subtracting the decedent's adjusted basis in the calves from the sale proceeds. See §§ 691(a)(1), 1014(a) (basis of property acquired from decedent is the fair market value at date of decedent's death), 1014(c) (§ 1014(a) does not apply to property which constitutes a right to receive an item of income in respect of a decedent under § 691). The characterization of the sales transaction thus determines whether the estate uses the decedent's adjusted basis or a stepped-up basis (fair market value on date of death) in calculating the gain from the sale. The amount of income tax deficiency at issue is $185,384.10.

The Tax Court decided that the sale proceeds did not constitute "income in respect of a decedent" under § 691(a)(1). 74 T.C. at 641. After noting that § 691 does not itself define "income in respect of a decedent," the Tax Court reviewed the history of the section, ² referred to the applicable regulations, 26 C.F.R. § 1.691(a)(1)-(3) (1981), ³ examined the case law, ⁴ and distilled a four-factor test for determining whether sale proceeds constitute "income in respect of a decedent": (1) whether the decedent entered into a legally significant arrangement regarding the subject matter of the sale, ⁵ (2) whether the decedent performed the substantive (nonministerial) acts required as preconditions to the sale, ⁶ (3) whether there existed at the time of the decedent's death any economically material contingencies which might have disrupted the sale, ⁷ and (4) whether the decedent would have eventually received the sale proceeds if he or she had lived. ⁸ 74 T.C. at 639-41.

The Tax Court concluded that the decedent had entered into a legally significant agreement to sell the calves on the basis of the livestock sales contract. The Tax Court also found that there were no economically material contingencies which could potentially have disrupted the sale; the transaction was not contingent upon the actions or approval of third parties. Compare Keck v. Commissioner, 415 F.2d 531, 534 (6th Cir. 1969). Further, the decedent, if he had lived, would have received the sale proceeds; the transaction was not effective only at death. See note 8 supra. The Tax Court, however, concluded that the decedent had not performed the substantive acts required under the livestock sales contract. 74 T.C. at 644. At the date of the decedent's death one-third of the calves were not in "deliverable" condition; all the calves required care and feeding until actually delivered. The estate assumed responsibility for the care and feeding of all the calves until delivery (for approximately one month). The Tax Court concluded that the activities performed by the estate were not perfunctory or ministerial and that these activities were sufficient to remove the sale proceeds from the scope of § 691(a)(1). Id. at 644-45.

On appeal the Commissioner does not disagree with the four-factor test developed by the Tax Court. The Commissioner argues that the Tax Court misapplied the test and that, under a proper application of the test, that portion of the sale proceeds attributable to the calves which were "deliverable" at the date of the decedent's death constitute "income in respect of a decedent" under § 691(a)(1). See 74 T.C. at 646 (Simpson, J., concurring). This argument was not raised below by either party. ⁹ Ordinarily we do not consider questions of law which were not presented to the court below except in "exceptional cases or particular circumstances ... where injustice might otherwise result." Hormel v. Helvering, 312 U.S. 552, 557, 61 S.Ct. 719, 721, 85 L.Ed. 1037 (1941). However, in order to determine whether the Tax Court misapplied its four-factor test, we necessarily reach the Commissioner's apportionment or allocation argument. We think that the apportionment or allocation argument incorrectly emphasizes the condition or character of the subject matter of the sale instead of the status of the transaction itself at the time of the decedent's death. For the reasons discussed below, we affirm the decision of the Tax Court.

Stated in misleadingly simple terms, whether income is considered income in respect of a decedent under § 691 depends upon whether the decedent had a right to receive income at the time of his or her death. The focus is upon the decedent's right or entitlement to income at the time of death.

Although it is pertinent to inquire whether the income received after death was attributable to activities and economic efforts of the decedent in his lifetime, these activities and efforts must give rise to a right to that income. And the right is to be distinguished from the activity which creates the right. Absent such a right, no matter how great the activities or efforts, there would be no taxable income under § 691.

Trust Co. v. Ross, 392 F.2d 694, 695 (5th Cir. 1967) (per curiam), cert. denied, 393 U.S. 830, 89 S.Ct. 97, 21 L.Ed.2d 101 (1968); accord, Halliday v. United States, 655 F.2d 68, 71 (5th Cir. 1981); Claiborne v. United States, 648 F.2d 448, 452 (6th Cir. 1981); Keck v. Commissioner, supra, 415 F.2d at 533-34; Commissioner v. Linde, 213 F.2d 1, 4-8 (9th Cir.), cert. denied, 348 U.S. 871, 75 S.Ct. 107, 99 L.Ed. 686 (1954); Estate of Sidles v. Commissioner, 65 T.C. 873, 881 (1976), aff'd mem. 553 F.2d 102 (8th Cir. 1977).

The leading commentators have proposed the following as a "tentative working definition" of income in respect of a decedent ¹⁰:

Items of income in respect of a decedent ... are payments received toward satisfaction of a right or expectancy created almost entirely through the efforts or status of the decedent and which, except for his death and without further action on his part, the decedent would have realized as gross income. Two observations should be made. First, the concept is manifestly broader than the mere accrued earnings of a cash basis decedent. Second, despite the breadth of this tentative definition, § 691 does not reach the income potential in a decedent's appreciated property, even if that appreciation is due to the decedent's own...