Estate of Barr v. Commissioner
1963 U.S. Tax Ct. LEXIS 136, 40 T.C. 227 (1963)
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Rule of Law:
Discretionary, non-contractual post-death payments made by an employer to a deceased employee's surviving spouse are not includable in the decedent's gross estate under I.R.C. § 2033 or § 2039 because the decedent possessed a mere hope or expectancy of payment, not a legally enforceable property right.
Facts:
- William E. Barr was an employee of the Eastman Kodak Co. for 28 years until his death.
- Eastman had a long-standing but voluntary practice of paying a year-end 'wage dividend' to eligible employees.
- To be eligible for the wage dividend, an employee had to be alive and on the payroll on the last day of Eastman's fiscal year.
- Eastman's policy stated it 'may, at its option,' pay a death benefit equivalent to the wage dividend to the family of an employee who died during the year, after investigating the family's circumstances.
- The company had a similar discretionary practice of paying a 'salary death benefit' for the remainder of the pay period in which an employee died.
- William E. Barr died on March 30, 1957, well before the end of the fiscal year and before any 1957 wage dividend was declared.
- Approximately one year after Barr's death, Eastman paid a 'wage dividend death benefit' and a 'salary death benefit' to his surviving spouse, Frances M. Barr.
- Barr had no contract with Eastman that granted him or his estate an enforceable right to these post-death payments.
Procedural Posture:
- Frances M. Barr, as executrix of the Estate of William E. Barr, filed a Federal estate tax return, excluding certain death benefits paid by the decedent's employer.
- The Commissioner of Internal Revenue (Respondent) audited the return and determined a tax deficiency, asserting that the death benefits should have been included in the gross estate.
- The Estate of William E. Barr (Petitioner) challenged the Commissioner's determination in the Tax Court of the United States.
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Issue:
Are discretionary post-death payments made by an employer to a deceased employee's surviving spouse, which the employee had no enforceable right to receive during their lifetime, includable in the decedent's gross estate under I.R.C. § 2033 or § 2039?
Opinions:
Majority - Pierce, Judge
No. The post-death payments are not includable in the decedent's gross estate. To be includable under § 2033, the decedent must possess an 'interest' in the property at the time of death. Here, Mr. Barr had no enforceable right to the payments, only a 'mere hope or expectancy' that Eastman would exercise its discretion to make them. The payments were contingent on numerous future events controlled by Eastman, such as the declaration of a dividend and a specific decision to grant a death benefit. Therefore, no property interest passed from the decedent to his widow. Similarly, the payments are not includable under § 2039, which requires a 'contract or agreement' under which the decedent possessed a right to receive payments. Eastman's voluntary and discretionary policy did not constitute an enforceable contract, a prerequisite for the application of § 2039. The company's own rules distinguished between an employee who died before the year-end (payment at company's 'option') and one who survived (payment 'as a matter of right'), reinforcing the non-contractual nature of the benefits paid in this case.
Analysis:
This case establishes a clear distinction between a legally enforceable right to post-employment benefits and a mere expectancy based on a company's consistent but discretionary practice. It clarifies that for estate tax purposes under § 2033, the decedent's 'interest' must be a vested and enforceable property right at the time of death. The decision also narrowly construes the 'contract or agreement' requirement of § 2039, confirming that it refers to a legally binding arrangement, not just a pattern of voluntary payments. This provides a blueprint for employers to structure death benefit plans as discretionary gratuities to avoid their inclusion in a deceased employee's gross estate.
