Richardson v. Comm'r of Internal Revenue
| Decision Date | 23 July 1975 |
| Docket Number | Docket No. 1204-74. |
| Citation | 64 T.C. 621 |
| Parties | GALE R. RICHARDSON AND GENEVIEVE RICHARDSON, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Walter W. Petroski, for the petitioners.
David J. Duez, for the respondent.
A portion of the compensation otherwise receivable by petitioner from his employer was placed in a nonexempt trust for his benefit during 1960 and 1970. The trust agreement contained several provisions for the disposition of the trust funds in the event of the termination of petitioner's employment or his death and provided that he would render postretirement advice and counsel as required by his employer. Held, the entrusted funds deposited prior to Aug. 1, 1969, were nonforfeitable within the meaning of sec. 402(b), I.R.C. 1954, and the funds deposited after that date, when sec. 83, I.R.C. 1954, became applicable, were ‘not subject to a substantial risk of forfeiture’ within the meaning of sec. 83(a), I.R.C. 1954. Held, further, neither a letter ruling issued to another taxpayer nor letter addressed to Petitioner estops respondent from determining that the amounts deposited in trust for petitioner's benefit are taxable to him for 1969 and 1970.
Respondent determined deficiencies in the amounts of $4,064.47 and $6,635.62 in petitioners' Federal income tax for 1969 and 1970, respectively. The issues for decision are:
(1) Whether funds placed in trust by petitioner Gale R. Richardson's employer during 1969 and 1970 were properly taxable to petitioners during those years. The resolution of this issue, in turn, depends upon whether amounts transferred to the trust prior to August 1, 1969, were nonforfeitable within the meaning of section 402(b)1 and whether the amounts transferred to the trust after that date were subject to a substantial risk of forfeiture within the meaning of sections 83(a) and 83(c)(1).
(2) Whether respondent is estopped from contending that such amounts were taxable in the years of transfer.
All the facts are stipulated.
Petitioners Gale R. Richardson (hereinafter petitioner, Dr. Richardson, or the doctor) and Genevieve Richardson, husband and wife, were legal residents of Minot, N. Dak., at the time they filed their petition. Petitioners timely filed their joint Federal income tax returns for 1969 and 1970, based upon the cash receipts and disbursements method of accounting, with the District Director of Internal Revenue at Fargo, N. Dak.
On January 1, 1967, Dr. Richardson entered into an employment agreement with St. Joseph's Hospital of Minot, N. Dak. (hereinafter the hospital), and that agreement, as modified, was in effect at all times relevant to this proceeding. The agreement provided for the following:
(1) Dr. Richardson would be responsible for the operation of the hospital's pathology laboratory.
(2) The compensation paid Dr. Richardson would be determined according to a percentage of the fees charged for most laboratory services rendered by the hospital.
(3) Dr. Richardson would be allowed to engage in the practice of pathology outside the hospital.
(4) Dr. Richardson would be granted use of the hospital facilities for purposes of doing referral work for which he would collect fees and remit an agreed percentage to the hospital to cover its laboratory maintenance costs.
(5) Dr. Richardson would receive a monthly payment of 1/12 of his estimated annual earnings of fees collected by the hospital.
On May 1, 1969, the agreement was modified by an Amendment to Contract of Employment, which provided a deferred-compensation arrangement. Under this arrangement, a portion of the compensation otherwise payable to Dr. Richardson, in the amount of $1,000 per month, would be paid instead to the First National Bank of Minot, N. Dak. (hereinafter Minot bank), as trustee. On the same day, a trust agreement was entered into between the hospital, as settlor, and the Minot bank, as trustee. The trust agreement provided generally that the funds withheld from each monthly payment to Dr. Richardson by the hospital, in accordance with the terms of the May 1, 1969, Amendment to Contract of Employment, would be held in trust by the Minot bank for the benefit of any person, corporation, or trust designated by Dr. Richardson, and in the absence of any designation by him, Dr. Richardson would be the beneficiary, with disbursements to be made upon Dr. Richardson's death, retirement, or separation from the service of the hospital. The agreement contemplated that 50 percent of the funds would be invested in an insurance and annuity contract on the doctor's life and the remainder in mutual fund shares.
The trust agreement contained a clause prohibiting petitioner from assigning any of the benefits provided by the trust and also provided that:
3.1 The doctor shall, during his lifetime and after termination of his Services and while his health permits, render to the Hospital such advice and counsel as the Hospital may reasonable and from time to time require but not such as would constitute full-time rendering of services. The Doctor shall not, after termination of his Services, absent himself from the continental limits of the United States for a period longer than three consecutive months in any one calendar year without the written consent of the Hospital.
3.2 For such advice and counsel as the Doctor may render in accordance with Section 3.1, he shall be compensation by the Hospital at the same rate as his cash compensation rate immediately before termination of his Services. In addition, the Hospital shall reimburse the Doctor for reasonable expenses actually incurred by him in rendering such advice and counsel.
On April 2, 1970, the parties executed an amended trust agreement, which, with respect to petitioner's rendering advice and counsel to the hospital after terminating his services, added the following language:
If, for any reason, without good cause, the Doctor shall after the termination of his services and while his health permits, fail and refuse to render such advice and counsel, he shall, after due notice of said breach, forfeit all rights under this Agreement.
The amended agreement also provided that in the event of a revocation or termination of the trust,2 all assets held by the trustee shall revert to the hospital, which shall administer and disburse the assets in accordance with the trust. While still other amendments were made, they are not material to the issue in controversy.
The hospital never received any advice and counsel from retired physicians during the tax years in issue, nor at any time prior thereto. And there is no evidence of record indicating any plan on the part of the hospital to institute a consultation program.
During the years in issue, the following amounts were paid to the Minot bank by the hospital for the benefit of Dr. Richardson:
+----------------+
¦Year ¦Amount ¦
+------+---------¦
¦ ¦ ¦
+------+---------¦
¦1969 ¦$7,000 ¦
+------+---------¦
¦1970 ¦12,000 ¦
+----------------+
On their joint Federal income tax returns for 1969 and 1970, petitioners did not report the $7,000 and $12,000, respectively, as gross receipts from Dr. Richardson's profession. In the statutory notice, dated November 21, 1973, respondent determined that such amounts were taxable as ordinary income to petitioners in the years the amounts were transferred to the trust.
The parties appear to agree that the Minot bank trust was not exempt from income taxes under section 501(a). Quite obviously, the hospital's monthly payments to the trust were an economic benefit to Dr. Richardson even if he did not have immediate access to the funds. E. T. Sproull, 16 T.C. 244, 247-248 (1951), affd, per curiam 194 F.2d 541 (6th Cir. 1952). Those payments are, therefore, taxable to petitioners when made unless there is some applicable Code provision which defers their taxability. We turn to section 402(b), which prescribes the rules for the taxability of beneficiaries of nonexempt trusts, and we find that section was amended by section 321(b)(1), Tax Reform Act of 1969, 83 Stat. 590, with respect to contributions to such trusts made after August 1, 1969. Since the hospital made contributions to the trust both before and after that date, we must consider both versions of the section.
In the form applicable to contributions made prior to August 1, 1969, section 402(b)3 provided that contributions to an employees' trust were includable in the employees' gross income ‘for the taxable year in which the contribution is made to the trust in the case of an employee whose beneficial interest in such contribution is nonforfeitable at the time the contribution is made.’ Section 1.402(b)-1(a)(2)(i), Income Tax Regs., defines the term ‘nonforfeitable’ to mean there is ‘no contingency under the plan which may cause the employee to lose his rights in the contribution.’
The revised version of section 402(b), which applies to payments to a trust made after August 1, 1969, provides that contributions to an employees' nonexempt trust ‘shall be included in the gross income of the employee in accordance with section 83 ().’ Section 83(a) provides generally that if, in connection with the performance of services, property is transferred to any person, the value of the property shall be included in the gross income of the person who performed the services in the first year in which such person's rights in the property ‘are transferable or are not subject to a substantial risk of forfeiture.’ Section 83(c)(1) defines a ‘substantial risk of forfeiture’ as follows:
(c) SPECIAL RULES.— For purposes of this section—
(1) SUBSTANTIAL RISK OF FORFEITURE.— The rights of a person in property are subject to a substantial risk of forfeiture if such person's rights to full enjoyment of such property are conditioned upon the future performance of...
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