Docket No. 15218.
C. Walter Randall, Jr., Esq., for the petitioner. William H. Best, Jr., Esq., for the respondent.
Rodman Wanamaker died in 1928, the owner of the stock of the three Wanamaker corporations. By his will a testamentary trust was created to hold this stock for certain purposes and the decedent was designated by the will as managing trustee. The trust provided that the managing trustee should serve as president of the three corporations. Decedent occupied these four offices until November 22, 1937. At this time, although of clear mind and attending daily to the duties of his offices, decedent was thought by his fellow trustees and the directors of the corporations to be too old-fashioned in his method of operation and it was desired if possible, to secure his retirement. At this time decedent was receiving an annual salary of $106,000. Decedent, upon being approached by the other trustees, agreed to resign his offices in consideration of the payment to him of a stated annual sum for a period of 10 years with the further proviso that in case of his death within that term the payment would be continued to the widow for the remainder of the time or until her death if before its expiration. A formal contract embodying these conditions was executed by the parties. The decedent died in 1943. Held, that the value as of the death of the decedent of the remaining payments provided by the agreement to be made to his widow is includible in his gross estate under section 811(c) of the Internal Revenue Code; held, further, that the decedent's estate is entitled to an additional deduction, as representing claims against the estate, of $1,955.84 for income taxes paid by the estate for the year 1943. C. Walter Randall, Jr., Esq., for the petitioner. William H. Best, Jr., Esq., for the respondent.
Respondent has determined a deficiency in estate tax in the amount of $55,393.18. The issues presented are: (a) Whether the commuted value of future payments under a contract between the decedent and John Wanamaker Philadelphia, a corporation, which payments were to be made to decedent's wife after his death, is includible in decedent's gross estate under section 811(c) of the Internal Revenue Code, and (b) whether decedent's estate is entitled to additional deductions as claims against the estate for income taxes in the amounts of $6,722.35 for 1942 and $15,554 for 1943.
FINDINGS OF FACT
The decedent, William L. Nevin, was born August 9, 1857, and died April 13, 1943. The estate tax return was filed with the collector of internal revenue at Philadelphia, Pennsylvania. From July 1, 1890, to November 22, 1937, the decedent was associated with the department store business of John Wanamaker. In 1909 he assisted in the organization of the Wanamaker corporations namely, John Wanamaker Philadelphia, John Wanamaker New York and the A. T. Stewart Realty Co.
Rodman Wanamaker died in 1928, owning the stock of the three corporations. By the terms of his will this stock was placed in trust for certain purposes and the decedent was, by will, designated as managing trustee, The will further provided that the managing trustee should serve as president of all three of the corporations. Decedent thereupon became managing trustee of the aforementioned trust and president and director of each of the three corporations, serving as such until November 22, 1937.
In November 1937 the other trustees of the Rodman Wanamaker trust had become dissatisfied with the decedent's administration of the three corporations. The decedent was then 80 years of age and, although his mind was clear and he was engaged in actively carrying on the businesses, it was thought by the other trustees that he had outlived his usefulness. His operation of the three corporations was not considered by the other trustees to be up to date. He was thought by them to be living in the past rather than in the present and getting into a frame of mind where he was judging employees of the corporations according to his personal likes and dislikes rather than their abilities.
The trustees thought it was advisable in the interest of the corporations that the decedent be replaced as managing trustee. It was decided that to effectuate this purpose the decedent be approached and some arrangement made with him, if possible, to secure his retirement. Robert H. Montgomery, a fellow trustee and close friend of the decedent, was selected to interview the decedent and discuss the matter with him and make some arrangement, if possible, to secure his retirement. At this time the decedent was receiving an annual salary of $106,000, all of which was paid by John Wanamaker Philadelphia.
In furtherance of the plan of the other trustees, Colonel Montgomery called upon the decedent at his home and discussed the matter with him and secured his agreement to resign as managing trustee and as president and director of the three corporations.
A contract thereupon was drawn by Colonel Montgomery covering the agreement made by him with the decedent with respect to his resignation from the several offices in question. This agreement, executed the 22d day of November 1937, between John Wanamaker Philadelphia and the decedent, provides, inter alia, as follows:
AND WHEREAS, Rodman Wanamaker, late of the City and County of Montgomery died on the 9th day of March, 1928, having first made and published his last Will and Testament and Codicils thereto, duly probated in the Office of the Register of Wills in and for the County of Montgomery.
AND WHEREAS, in and by said Will it is provided that the capital stock of John Wanamaker Philadelphia should be held In Trust by certain Trustees for the uses and purposes set forth in said Will and Codicils.
AND WHEREAS, in and by said Will and Codicils it was provided that William L. Nevin should be the Managing Trustee of the Trustees of the Estate of Rodman Wanamaker holding said stock of John Wanamaker Philadelphia, and that said Managing Trustee should be President of John Wanamaker Philadelphia, John Wanamaker New York, and A. T. Stewart Realty Co.
AND WHEREAS, William L. Nevin has also acted as Director of John Wanamaker Philadelphia, John Wanamaker New York, and A. T. Stewart Realty Co. since the death of Rodman Wanamaker.
AND WHEREAS, William L. Nevin has signified his willingness to retire from his offices as Managing Trustee of the Estate of Rodman Wanamaker, Deceased; as Trustee of the Estate of Rodman Wanamaker, Deceased; as President of John Wanamaker Philadelphia; as President of John Wanamaker New York; as President of A. T. Stewart Realty Co.; as Director of John Wanamaker Philadelphia; as Director of John Wanamaker New York, and as Director of A. T. Stewart Realty Co., in consideration of the execution of this agreement.
AND WHEREAS, William L. Nevin has served the said John Wanamaker Philadelphia, and its subsidiaries, in various capacities since July 1st, 1890, and has agreed to give during his lifetime such advice and render such assistance as he may be called upon by the Board of Directors to give and render, provided in his sole and final judgment he is able so to give and render.
AND WHEREAS, the stockholders and Board of Directors, in recognition of the foregoing, have agreed to make certain payments to William L. Nevin and his wife, Mary Grace Nevin, until the death of the survivor, or October 1st, 1947, whichever event may first occur.
THEREFORE IT IS MUTUALLY AGREED by and between the parties hereto as follows, each party intending to be legally bound:
1. In consideration of the execution of this agreement, William L. Nevin does hereby resign (a) as Trustee of the Estate of Rodman Wanamaker; Deceased. (b) as Managing Trustee of the Estate of Rodman Wanamaker, Deceased; (c) as President of John Wanamaker Philadelphia; (d) as President of John Wanamaker New York; (e) as President of A. T. Stewart Realty Co.; (f) as Director of John Wanamaker Philadelphia; (g) as Director of John Wanamaker New York; (h) and as Director of A. T. Stewart Realty Co.. said resignations to take effect and all remuneration therefor to cease as of October 1, 1937.
2. In consideration of the execution of this agreement, John Wanamaker Philadelphia agrees to pay a pension to William L. Nevin, in equal monthly installments (the first payment to be made November 1st, 1937), at the rate of Fifty-five thousand Dollars ($55,000) per year until his death, or to Mary Grace Nevin, his wife, after his death, for a period of six (6) years from October 1st, 1937; and at the rate of Fifty thousand Dollars ($50,000) a year to William L. Nevin, or to his said wife after his death, for a further period of four (4) years; the said monthly payments to cease upon the death of the survivor of William L. Nevin and Mary Grace Nevin, his wife, or October 1st, 1947, whichever event shall first occur.
3. In consideration of the execution of this agreement, William L. Nevin agrees to remise, release, quitclaim and forever discharge John Wanamaker Philadelphia, John Wanamaker, New York, A. T. Stewart Realty Co., and the Estate of Rodman Wanamaker, Deceased, of and from any and all claims and demands whatsoever, excepting the payments hereunder.
4. In consideration of the execution of this agreement, William L. Nevin agrees to execute such other and further documents as may be necessary to carry out the intent and purpose of this agreement; and agrees during his lifetime to give and render such advice and such assistance as he may be called upon by the Board of Directors of John Wanamaker Philadelphia to give and render, provided in his sole and final judgment he is able so to give and render.
Following the execution of the above agreement the decedent received no further payments of salary from John Wanamaker Philadelphia, but was paid from that date at the rate of $55,000 a year until his death on April 13, 1943. Thereafter, payments at the rate of $55,000 a year were made to his widow until November 22, 1943 at which time they were reduced to a rate of $50,000 a year and continued at such rate until her death on June 5, 1946.
In determining the deficiency respondent has computed the value of the expected payments to decedent's widow as their commuted present value at the time of his death. That value was the sum of $210,311.61, which respondent has included in decedent's gross estate under section 811(c) of the Internal Revenue Code.
Contemporaneously with the execution of the aforementioned contract of November 22, 1937, another contract was executed between John Wanamaker Philadelphia, as party of the first part, and the decedent and his wife, Mary Grace Nevin, as parties of the second part. Under this agreement, the party of the first part agreed to lend to the parties of the second part $30,000, to be repaid by them in 72 monthly installments of $416.66. This loan was to carry no interest and it was provided that, in the event of the death of the parties of the second part before final repayment, any balance remaining on the debt would be canceled. It was further provided that the party of the first part might deduct the amount of the monthly payments from the payment to be made the decedent, or his widow, under the terms of the first mentioned contract. At the time of decedent's death there was still due under this loan contract the sum of $1,952.34, which represented a charge against any future payments by the corporation to the surviving widow.
For the year 1942 the income taxes assessed against decedent were in the sum of $26,889.38. Of this sum payment had been made by decedent of $6,722.35 on the filing of his return shortly before his death. Following decedent's death, payment of a second installment of $6,722.35 was made on June 12, 1943, by decedent's widow, as administratrix of his estate. No other payment was made with respect to the 1942 tax liability, in view of the enactment of the Current Tax Payment Act forgiving the taxes for that year. For the period January 1 to April 13, 1943, the date of decedent's death, income taxes were assessed in the sum of $14,223.39, against which a payment of $14,349 was made on November 15, 1943. This payment was $125.61 in excess of the assessment and an overpayment in this amount was refunded June 29, 1945. Subsequently, an additional assessment of income tax was made for the period January 1 to April 13, 1943, of $1,330.61 which, together with interest of $272.47, or a total of $1,603.08, was paid by the administratrix on October 8, 1947. In the estate tax return, deduction was taken as a claim against the estate of $14,349, the amount paid on account of 1943 income taxes. In determining the deficiency this deduction was reduced by respondent to $13,598.16.
It is petitioner's contention that the payments to be made to the decedent and his wife under the contract of November 22, 1937, represented purely voluntary pension payments by John Wanamaker Philadelphia. We are asked to find upon the record that these payments were not made as a legal liability of the company under a contract under which the company had received a valid consideration for the payments it agreed to and did make, but that, on the other hand, such payments were made under a pension voluntarily awarded to the decedent because of his service to the company in past years.
If such conclusion of fact were sound, it could be argued that the value of the payments to be made to the decedent's widow after his death would not be includible in his gross estate under section 811(c). G.C.M. 17817 (1 C.B. 1937, 281). See also, Central Hanover Bank & Trust Co., Executor, 40 B.T.A. 268, and Dimock v. Corwin, 19 Fed.Supp. 56.
Respondent argues that the payments in question were legal obligations of John Wanamaker Philadelphia assumed under the contract of November 22, 1937, and were not voluntary payments of a pension granted to the decedent by that company. He contends that the right to receive payments under this contract and to require their continuance to his wife after his death was acquired by the decedent by purchase for a valuable consideration, namely, his agreement to retire as managing trustee of the Rodman Wanamaker trust and as president and director of the three Wanamaker corporations. It is insisted that the decedent was under no obligation to resign his trusteeship, and could not have been required to do so, and that his agreement to resign, and thus relieve the company from the payment of his annual salary of $106,000, and to permit the trustees to appoint a successor was secured by a definite binding contract on the part of John Wanamaker Philadelphia to pay the decedent a specified sum of money each year for a term of 10 years, with the further provision, in case of his death before the expiration of that time, to continue the payments for the stated period to his widow.
Respondent argues that in such circumstances the payments are analogous to annuity payments under an annuity contract purchased by the decedent, in which he has designated a beneficiary to receive payments for the stated period after his death. Upon this premise it is urged that the commuted value as of the time of decedent's death of the payments to be made under the contract to his widow is includible in his gross estate under the rule announced in Commissioner v. Clise, 122 Fed.(2d) 998; certiorari denied, 315 U.S. 821; and Mearkle's Estate v. Commissioner, 129 Fed.(2d) 386.
It thus appears that the question is essentially one of fact, namely, whether the evidence shows the payments under the contract of November 22, 1937, were merely pension payments under a pension awarded the decedent by the corporation, or were payments exacted by the decedent from the corporation in consideration of his voluntary retirement and release of the corporation from salary payments to him of approximately twice the annual sum agreed upon.
The burden of proof, of course, is upon the petitioner. The record convinces us that the petitioner has failed to establish that the payments basing the dispute were made as a pension voluntarily awarded the decedent.
The very fact that the payments were made under a contract formally executed and legally binding upon the parties is difficult to reconcile with the voluntary awarding of a pension to a retiring employee. The contract itself specifically states that the payments agreed upon are in consideration of the decedent's agreement to retire from the lucrative positions which he then held. There is no evidence that impresses us in the record tending to fix the payments provided in the contract as intended to be pension payments. The testimony by one officer of the three corporations, who was also a fellow trustee of the decedent, that he considered the contract by John Wanamaker Philadelphia with decedent as one providing a pension does not thus qualify. He testified that the Wanamaker corporations had no pension plan, but that it was their custom to provide for retiring employees and not to cut them adrift.
In this connection it may be noted that there is no testimony from Robert H. Montgomery, decedent's close friend and fellow trustee, who discussed the matter with the decedent as the representative of the Wanamaker corporations, negotiated with him the conditions of his retirement, and prepared the contract covering the agreement to retire.
The facts and circumstances surrounding the transaction lead to the conclusion that the obligation assumed by John Wanamaker Philadelphia under the contract to pay the decedent a specified amount for each of the following 10 years, with the provision that, in case of his death prior to that, his widow surviving, the remaining payments would be continued to her, was one exacted by the decedent as the price to be paid in consideration of his resignation. The situation was not the usual one existing in the case of an old employee who could be relieved of office at any time at the option of his employer. Here the resignation of decedent could not have been forced. He was admittedly of clear mind and attending daily to the affairs of his office. His fellow trustees and the directors of the several corporations were in no position to notify the decedent that he was retired as of a certain date with a pension voluntarily awarded him. Decedent's fellow trustees and directors desired his resignation in the interests of the corporations, but there appears to be no doubt of the fact that they were in no position to force it. If they were to secure decedent's resignation, it was necessarily upon his terms, and it appears to us that the agreement embodied in the contract of November 22, 1937, was the decedent's price for his voluntary resignation.
We think that the situation here falls within the rule of Commissioner v. Clise, supra. There the decedent acquired, for a valuable consideration, the right to receive certain annual payments, to be continued to his wife after his death. His wife's right to receive such payments was contingent upon her surviving the decedent. His death brought her enjoyment of the right into being. As the court said in the Clise case, quoting Helvering v. Hallock, 309 U.S. 106,
‘ * * * Section 302(c) deals with property not technically passing at death but with interests theretofore created. The taxable event is a transfer inter vivos. But the measure of the tax is the value of the transferred property at the time when death brings it into enjoyment. * * * ‘
We sustain the action of respondent on this issue.
The second issue is upon petitioner's claim to additional deductions from the gross estate as constituting income tax liabilities due from decedent at the time of his death in the sums of $6,722.35 for 1942 and $15,554 for 1943.
The record shows that for 1942 there was assessed an income tax liability of $26,889.38 against the decedent, of which he paid the first installment of $6,722.35.
Two months after his death the administratrix paid the second installment of this tax in the same amount, leaving an unpaid balance of $13,444.68. Thereafter, and before the estate tax return was filed, the Current Tax Payment Act forgave all of the taxes for 1942; consequently no payment was made upon the remaining balance of $13,444.68. The two payments already made of $6,722.35 each upon 1942 tax thereupon became subject to refund or credit upon 1943 tax. Whether these taxes for 1942 were made the subject of a claim for refund or reflected in the computation of the tax liability for 1943, we do not know, since the return for the later year is not in evidence. Upon these facts it certainly can not be found that decedent's estate is entitled to an additional deduction representing income taxes for 1942.
With respect to the deduction of $15,554 for 1943 taxes, it appears that the estate tax return reported a deduction of $14,349, this being the amount paid for the period January 1, 1943, to the date of decedent's death, April 13, 1943. However, the tax assessed upon the return filed was in the sum of $14,223.39 and an overpayment of $125.61 was refunded to the estate. Later, an additional assessment of $1,330.61 was made, together with interest of $272.47, which was paid by the estate. It is thus apparent that the petitioner is entitled to a deduction as a claim against the estate of the full amount of the tax assessed and paid for the period January 1 to April 13, 1943, this being the total of $14,223.39 and $1,330.61, or $15,554. As respondent in computing the deficiency, allowed a deduction for 1943 tax of only $13,598.16, petitioner is entitled to an additional deduction of $1,955.84.
Decision will be entered under Rule 50.