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

• Decision Date: 30 June 1980
• Docket Number: Docket No. 1685-76.
• Citation: 74 T.C. 613
• Parties: ESTATE of MURRAY J. SIEGEL, DECEASED, FREDERICK ZISSU and NORMAN LIPSHIE, EXECUTORS, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

74 T.C. 613

ESTATE of MURRAY J. SIEGEL, DECEASED, FREDERICK ZISSU and NORMAN LIPSHIE, EXECUTORS, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 1685-76.

United States Tax Court

Filed June 30, 1980.

Decedent entered into an agreement with his employer whereby he was to be paid an annual rate of compensation for performance of services for a fixed term of employment. The agreement provided that in the event of disability, decedent was to continue to receive payments under the agreement for the remainder of the term; in the event of death, the remaining payments were to be paid to decedent's children. The agreement further provided that decedent and his employer could mutually consent to modify the children's rights and interests under the agreement. Decedent died while a full-time employee, and his children became entitled to the payments under the agreement. Held:

1. The agreement did not provide for postemployment benefits. Decedent did not have a right to an “annuity or other payment.” Therefore, the commuted value of the payments due decedent's children is not includable in decedent's gross estate under sec. 2039(a), I.R.C. 1954.

2. The parol evidence rule does not bar admission of testimony to explain the terms of the agreement.

3. The provision in the agreement whereby decedent and his employer could mutually consent to modify the children's rights and interests under the agreement constitutes a retained power to alter, amend, revoke, or terminate under sec. 2038(a)(1), I.R.C. 1954. Michael S. Barron and Thomas R. Schuttish, for the petitioner. ^*

Patrick E. Whelan, for the respondent.

CHABOT, Judge:

Respondent determined a deficiency in Federal estate tax against petitioner in the amount of $382,815.89. The other issues in this case having been severed for trial at a later date, the single issue now presented for decision is whether the commuted value of amounts payable to decedent's children under an employment contract between decedent and his employer is includable in decedent's gross estate either—-

(1) Under section 2039(a),¹ because decedent might have been entitled to postemployment disability benefits under the employment contract, or

(2) Under section 2038(a)(1), because decedent retained a power to alter, amend, or revoke his children's rights under the employment contract.²

FINDINGS OF FACT

Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.

Frederick Zissu and Norman Lipshie are petitioner's executors. When the petition in this case was filed, (1) petitioner's address was c/o Frederick Zissu, Executor, 174 Passaic Street, Garfield, N.J.; (2) Frederick Zissu resided in North Caldwell, N.J.; and (3) Norman Lipshie resided in New York, N.Y. At the time of his death, decedent Murray J. Siegel was domiciled in New Jersey.

Decedent died of a coronary occlusion on September 21, 1971, at the age of 57. Immediately before his death, decedent was employed by Vornado, Inc. (hereinafter sometimes referred to as Vornado), as its president and chief executive officer. He was also a member of Vornado's board of directors. Decedent served as president for the 6 years immediately before his death. Decedent was actively employed by Vornado until immediately before his death.

On September 30, 1965, decedent entered into a written employment agreement with Vornado, the relevant portions of which are as follows:

WHEREAS, SIEGEL (decedent) has been in the employ of the CORPORATION (Vornado), or a lessee thereof, as an officer for a period of at least five (5) years; and

WHEREAS, SIEGEL has made significant contributions to the successful management of the CORPORATION; and

WHEREAS, the CORPORATION is desirous of having SIEGEL continue to serve the CORPORATION, and SIEGEL is willing to so do if monetary provision is made for the care of SIEGEL's family subsequent to the death of SIEGEL and similar provision is made for SIEGEL in the event of his disability;

NOW, THEREFORE, in consideration of the premises, it is covenanted and agreed by and between the parties hereto as follows, to wit:

FIRST: The CORPORATION agrees to employ SIEGEL and SIEGEL agrees to serve the CORPORATION upon the terms and conditions hereinafter set forth.

SECOND: This agreement and the employment of SIEGEL hereunder shall commence on October 1, 1965 and shall continue to October 1, 1973.

THIRD: SIEGEL agrees to serve the CORPORATION faithfully and to the best of his ability, and to continue to serve the CORPORATION on the same terms and conditions as have heretofore been in effect at a salary of no less than Ninety Thousand ($90,000.00) Dollars per annum.

FOURTH: The CORPORATION shall pay to SIEGEL, if living, or to others in the event of his death the following sums upon the terms and conditions and for the periods hereinafter set forth:

(a) In the event of death or disability of SIEGEL on or before the expiration date of this agreement while in the employ of the CORPORATION, the CORPORATION shall pay to him, if living, or others (as hereinafter provided) in the event of his death, monthly, the following sums which shall be in lieu of any and all payments provided for in Paragraph “THIRD” hereof:

(i) An amount equal to the balance of the monthly salary then payable to SIEGEL up to the end of the month in which death occurs or in which his employment is duly terminated because of disability.

(ii) An amount equal to his then monthly salary rate for all successive months up to the expiration date of this agreement.

(b) Payments of the monthly sums herein-above provided for shall begin at the end of the month set forth in subparagraph “(a)(i)” hereof. Such payments shall be made to SIEGEL if living, otherwise divided equally among SIEGEL'S children, living at the time of each scheduled payment. In the event there are no living children payment shall be made to the Estate of SIEGEL.

FIFTH: Neither SIEGEL nor his children shall have any right to commute, encumber or dispose of the right to receive payments hereunder, which payments and the right thereto are expressly declared to be non-assignable and non-transferable. No right or interest is hereby granted to the children of SIEGEL except as set forth herein and such rights or interests are subject to any modification of this agreement by the mutual consent of SIEGEL and the CORPORATION.

SIXTH: This agreement shall be binding upon the parties hereto, their heirs, executors, administrators, successors or assigns, and supersedes all previous employment contracts for the periods provided herein.

The September 30, 1965, agreement was amended on October 24, 1967, to extend the term of employment from October 1, 1973, to September 30, 1977, to specify that decedent “shall be employed as President of Vornado,” and to increase the stated salary from $90,000 to $100,000 per year. The agreement was amended again on November 22, 1969, to extend the term of employment to November 30, 1979, and to increase the stated salary to $125,000 per year. (Hereinafter, the agreement of Sept. 30, 1965, and its amendments of Oct. 24, 1967, and Nov. 22, 1969, will be referred to collectively as the agreement.)

In 1962, Vornado's then president was disabled as the result of a heart attack. He continued to perform the duties of chief executive officer while hospitalized and also while recuperating at home. Decedent was aware of the disability of his predecessor.

About 1975, the head of Vornado's Two Guys Food Division was disabled as the result of open heart surgery. He continued to perform as many of his duties as he could while recuperating from the operation.

In 1978, Vornado's assistant vice president in charge of merchandising for the food division broke her ankle and her wrist. During her disability, she continued to manage her department from her home.

It was the customary practice at Vornado that management employees, such as decedent, would continue to render services to the company during disability. No management employee of Vornado had ever become disabled to such an extent that Vornado had terminated the employee's employment.

In the event of disability, decedent was obligated to render services to the best of his ability for the remaining term of the agreement and was under a continuing obligation during the term of the agreement to resume performing services as soon as he recovered sufficiently to do so.

Upon decedent's death, his children became entitled, under the agreement, to monthly payments from Vornado in the same amounts and for the same period of time as decedent would have been entitled to had he survived until November 30, 1979, and remained in Vornado's employ until that date. The commuted value of the payments to which decedent's children became entitled was $811,362. The executors, in filing decedent's Federal estate tax return, specifically noted the agreement but excluded the commuted value of the payments from decedent's gross estate.

Vornado's stock is listed on the New York Stock Exchange. On April 21, 1971, it had 11,677 shareholders. As of January 30, 1972 (the date of Vornado's audited balance sheet nearest decedent's date of death), there were 6,137,480 shares of Vornado stock outstanding. On the date of his death, decedent owned 1,300 shares of stock of Vornado. On the date of his death, decedent owned 10 of the 105 outstanding shares of Jaunty Dress Shops, Inc., which in turn owned 228,825 shares of Vornado on this date. During his life, decedent was also beneficial owner of 72 shares of stock in Jaunty Dress Shops, Inc., which were held in trust. His interest in these shares terminated on his death under the terms of the trust. The trustees of this trust were decedent, Jennie Siegel, and Joseph Lipshie. Under the terms of the trust, the trustees had the power to vote shares of stock held by the trust.

OPINION

The parties agree that the commuted value of the payments to...