Wolder v. CIR

• Decision Date: 21 February 1974
• Docket Number: Dockets 73-1507,73-1847 and 73-1848.,No. 136,373 and 374,136
• Citation: 493 F.2d 608
• Parties: Victor R. WOLDER and Marjorie Wolder, Appellants-Cross-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Appellee-Cross-Appellant. ESTATE OF Marguerite K. BOYCE et al., Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Appellant.
• Court: U.S. Court of Appeals — Second Circuit

493 F.2d 608 (1974)

Victor R. WOLDER and Marjorie Wolder, Appellants-Cross-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Appellee-Cross-Appellant.

ESTATE OF Marguerite K. BOYCE et al., Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Appellant.

Nos. 136, 373 and 374, Dockets 73-1507, 73-1847 and 73-1848.

United States Court of Appeals, Second Circuit.

Argued December 19, 1973.

Decided February 21, 1974.

Victor R. Wolder, appellant-cross-appellee pro se.

Jonathan S. Cohen, Tax Div., Dept. of Justice, Washington, D. C. (Scott P. Crampton, Asst. Atty. Gen., of the United States; Meyer Rothwacks and Carleton D. Powell, Dept. of Justice, Washington, D.C., on the brief), for appellee-cross-appellant and appellant commissioner of Internal Revenue.

Hewitt A. Conway, New York City, N. Y. (John F. Rossi, New York City, of counsel), for appellees Estate of Marguerite K. Boyce, Victor R. Wolder and Manufacturers Hanover Trust Co.

Before FRIENDLY, MANSFIELD and OAKES, Circuit Judges.

OAKES, Circuit Judge:

These two cases, involving an appeal and cross-appeal in the individual taxpayers' case and an appeal by the Commissioner in the estate taxpayer's case, essentially turn on one question: whether an attorney contracting to and performing lifetime legal services for a client receives income when the client, pursuant to the contract, bequeaths a substantial sum to the attorney in lieu of the payment of fees during the client's lifetime. In the individual taxpayers' case, the Tax Court held that the fair market value of the stock and cash received under the client's will constituted taxable income under § 61, Int.Rev. Code of 1954, and was not exempt from taxation as a bequest under § 102 of the Code. From this ruling the individual taxpayers, Victor R. Wolder, the attorney, and his wife, who signed joint returns, appeal. The Tax Court also held that the stock and cash received were constructively received by the taxpayer in 1965, the year of the death of the client, Marguerite K. Boyce, rather than 1966, the year the individual taxpayers actually received the stock and cash. The stock, consisting of 750 shares of common stock in Schering Corp., increased substantially in value from the date of Mrs. Boyce's death on July 24, 1965, until January of 1966 when the stock certificates were actually received by the individual taxpayers. The Commissioner appeals this decision of the Tax Court, the statute of limitations having run on the tax year 1965.¹

The estate case is conceded by all to hinge upon the ruling in the individual taxpayers' case, at least to the extent that, if the stock and cash which went to Attorney Wolder were taxable income to him, as the Tax Court found in his case, the estate is entitled to deduct the amount of the bequest to him as a debt of the decedent client.

The opinion of the Tax Court, by Judge Tannenwald, in the individual taxpayers' case is reported at 58 T.C. 974; the opinion of the same Tax Court judge in the estate case is reported at P-H Memo T.C., ¶ 72,204.² Jurisdiction in this court is conferred by § 7482, Int.Rev.Code of 1954.

There is no basic disagreement as to the facts. On or about October 3, 1947, Victor R. Wolder, as attorney, and Marguerite K. Boyce, as client, entered into a written agreement which, after reciting Mr. Wolder's past services on her behalf in an action against her ex-husband for which he had made no charge, consisted of mutual promises, first on the part of Wolder to render to Mrs. Boyce "such legal services as she shall in her opinion personally require from time to time as long as both . . . shall live and not to bill her for such services," and second on the part of Mrs. Boyce to make a codicil to her last will and testament giving and bequeathing to Mr. Wolder or to his estate "my 500 shares of Class B common stock of White Laboratories, Inc." or "such other . . . securities" as might go to her in the event of a merger or consolidation of White Laboratories. Subsequently, in 1957, White Laboratories did merge into Schering Corp. and Mrs. Boyce received 750 shares of Schering common and 500 shares of Schering convertible preferred. In 1964 the convertible preferred was redeemed for $15,845. In a revised will dated April 23, 1965, Mrs. Boyce, true to the agreement with Mr. Wolder, bequeathed to him or his estate the sum of $15,845 and the 750 shares of common stock of Schering Corp. There is no dispute but that Victor R. Wolder had rendered legal services to Mrs. Boyce over her lifetime (though apparently these consisted largely of revising her will) and had not billed her therefor so that he was entitled to performance by her under the agreement, on which she had had a measure of independent legal advice. At least the New York Surrogate's Court (DiFalco, J.) ultimately so found in contested proceedings in which Mrs. Boyce's residuary legatees contended that the will merely provided for payment of a debt and took the position that Wolder was not entitled to payment until he proved the debt in accordance with § 212, New York Surrogate's Court Act.³ The Surrogate Court proceedings on the part of the residuary legatees were not instituted until the latter part of February, 1966, and the surrogate's decision thereon was not handed down until September, 1966.

Since in the Commissioner's cross-appeal the timing of receipt is important, it is to be noted that Wolder and Manufacturers Hanover Trust Co. (Manufacturers) were appointed coexecutors of the estate on September 17, 1965, and that at the time of Mrs. Boyce's death the Schering stock was held in a custodial account with Manufacturers and registered in the name of its nominee. By letter dated October 1, 1965, Wolder advised Manufacturers that he elected to receive the cash and stock bequest and "recommended" the distribution be made forthwith of all specific legacies, including his own. Manufacturers did not comply, and in December, 1965, he again requested them to distribute the Schering stock. The estate was highly liquid and there were ample funds to pay creditors, taxes and estimated expenses. It was not until January 13, 1966, however, that Manufacturers assigned the shares; it was not until January 21 that a transfer was made on the books of Schering Corp., and the stock certificates were physically delivered to Wolder on January 25, 1966, about a month before the residuary legatees raised their objections. It was not until November 22, 1966, after Surrogate DiFalco's decision favorable to Wolder became final, that he received the $15,845 representing the cash from the sale of the Schering convertible preferred that took place prior to Mrs. Boyce's death. The fair market value of the Schering stock at the date of her death was $46,945.31; on January 13, 1966, it was $63,937.50. The Commissioner had evaluated the stock at $68,625, representing its value on February 2, 1966; the selection of a February date was apparently in turn based upon a letter by Mr. Wolder requesting a ruling in which he stated that he received the stock in that month, but in which he plainly was mistaken.

Wolder argues that the legacy he received under Mrs. Boyce's will is specifically excluded from income by virtue of § 102(a), Int.Rev.Code of 1954, which provides that "Gross Income does not include the value of property acquired by gift, bequest, devise or inheritance . . . ." See also Treas.Reg. 1.102-1(a). The individual taxpayer, as did dissenting Judge Quealy below, relies upon United States v. Merriam, 263 U.S. 179, 44 S.Ct. 69, 68 L.Ed. 240 (1923), and its progeny for the proposition that the term "bequest" in § 102(a) has not been restricted so as to exclude bequests made on account of some consideration flowing from the beneficiary to the decedent. In Merriam the testator made cash bequests to certain persons who were named executors of the estate, and these bequests were "`in lieu of all compensation or commissions to which they would otherwise be entitled as executors or trustees.'" 263 U.S. at 184, 44 S.Ct. at 70. The Court held nevertheless that the legacies were exempt from taxation, drawing a distinction — which in a day and age when we look to substance and not to form strikes us as of doubtful utility — between cases where "compensation is fixed by will for services to be rendered by the executor and where a legacy is paid to one upon the implied condition that he shall clothe himself with the character of executor." 263 U.S. at 187, 44 S.Ct. at 71. In the former case, Mr. Justice Sutherland said, the executor "must perform the services to earn the compensation" while in the latter case "he need do no more than in good faith comply with the condition that he be executor in order to receive the bequest." The Court went on to take the view that the provision in the will that the bequest was in lieu of commissions was simply "an expression of the testator's will that the executor shall not receive statutory allowances for the services he may render." While the distinction drawn in the Merriam case hardly stands economic analysis, Bank of New York v. Helvering, 132 F.2d 773 (2d Cir. 1943), follows it on the basis that it is controlling law.⁴

But we think that Merriam is inapplicable to the facts of this case, for here there is no dispute but that the parties did contract for services and — while the services were limited in nature — there was also no question but that they were actually rendered. Thus the provisions of Mrs. Boyce's will, at least for federal tax purposes, went to satisfy her obligation under the contract. The contract in effect was one for the postponed payment of legal services, i. e., by a legacy under the will for services rendered during the decedent's life.

Moreover, the Supreme Court itself has taken an entirely different viewpoint from Merriam when it comes to interpreting § 102(a), or its predecessor, § 22(b)(3), Int.Rev.Code of 1939, in reference to what are gifts. In ...