Wadewitz v. Commissioner
1963 U.S. Tax Ct. LEXIS 176, 39 T.C. 925 (1963)
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Rule of Law:
The value of a retirement contract providing payments to beneficiaries upon an employee's death before retirement is includable in the decedent's gross estate under Internal Revenue Code section 2039 if the decedent possessed a nonforfeitable right to receive future payments, even if those payments were contingent on retirement and had not yet commenced.
Facts:
- Edward H. Wadewitz was an active full-time employee and president of Western Printing & Lithographing Company ('Western').
- On July 1, 1946, Edward and Western executed a contract outlining retirement benefits and survivor payments.
- The contract stipulated that upon Edward's retirement, he would receive annual payments for 15 years, contingent on him not violating certain conditions such as working for a competitor or failing to be available for consultation.
- The contract further provided that upon Edward's death before retirement, his designated beneficiaries would receive monthly installments.
- Western acquired and retained ownership of annuity policies to fund its obligations under the contract, paying all premiums.
- The contract was amended twice: once to adjust payment amounts and once, on September 1, 1954, to designate Edward's wife, Nettie J. Wadewitz, and daughter, Wynnefred A. Callender, as beneficiaries.
- Edward never retired from his employment and died on January 15, 1955, while still serving as an officer and employee of Western.
- No payments were ever made to Edward himself under the retirement contract during his lifetime; however, after his death, Western consistently made payments to Nettie and Wynnefred as beneficiaries.
Procedural Posture:
- The Federal estate tax return for the estate of Edward H. Wadewitz was filed with the director of internal revenue at Milwaukee, Wis., on or about July 12, 1956, including the contract at a value of $148,889.67.
- On April 15, 1959, the executors of Edward’s estate filed a claim for refund of estate tax, arguing the contract was not properly includable in the decedent’s gross estate.
- The director of internal revenue denied the claim for refund.
- The respondent (Commissioner of Internal Revenue) issued a statutory notice of deficiency to the Estate of Edward H. Wadewitz disallowing a credit and a separate notice of deficiency to Nettie J. Wadewitz for additional income for the taxable year 1957.
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Issue:
Is the value of a retirement contract, which provided for payments to designated beneficiaries upon the decedent's death before retirement but under which the decedent himself never received payments and whose right to receive payments was contingent on retirement but otherwise nonforfeitable, includable in the decedent's gross estate under Internal Revenue Code sections 2033 or 2039?
Opinions:
Majority - Withey, Judge
No, the value of the retirement contract is not includable under section 2033, but yes, it is includable under section 2039. The court first addressed Internal Revenue Code section 2033, which includes in the gross estate property in which the decedent had an interest at death. The court found that Edward's interest under the contract was a terminable interest, meaning it was extinguished upon his death, and therefore was not property transferable through his estate by will or intestacy. It distinguished prior cases like Goodman v. Granger, Garber's Estate v. Commissioner, and Rosenberg v. United States, where decedents had more extensive control or present, indefeasible rights to withdraw funds during their lifetime. Edward's right to payments was contingent upon retirement and subject to conditions, unlike the decedents in those cases who had unfettered access or absolute control over funds. However, the court held that the value of the contract was includable under Internal Revenue Code section 2039, which covers annuities or other payments receivable by beneficiaries by reason of surviving the decedent, if the decedent either received payments or possessed the right to receive payments for a specified period. The court determined that no amount was "payable to the decedent" as Edward never retired and thus never received payments. The critical inquiry became whether Edward possessed a "right to receive" payments. Citing Bahen's Estate v. United States and IRS regulations, the court concluded that this 'right to receive' must be nonforfeitable. The court found Edward's right was nonforfeitable because the conditions for forfeiture (e.g., working for a competitor, not being available for consultation) were entirely within his exclusive control. By refraining from violating these provisions, he preserved his rights. Therefore, at his death, Edward held a nonforfeitable right to receive payments. Finally, the court determined that the condition that the right relates to a "period which does not in fact end before his death" was met. Since Edward died while still employed and before retirement, the 15-year payment period, though not commenced, neither began nor ended prior to his death, satisfying the statutory requirement. The court explicitly rejected the argument that the decedent's interest must commence in possession or enjoyment during his life for section 2039 to apply.
Analysis:
This case is significant for clarifying the scope of IRC section 2039, particularly concerning deferred compensation or retirement benefits where the decedent dies before receiving any payments. It establishes that a decedent's 'right to receive' payments for estate tax purposes under § 2039 can exist even if the payments are contingent on future events like retirement, so long as the right is otherwise nonforfeitable. The ruling expanded the reach of estate tax to include certain non-qualified deferred compensation plans, emphasizing that control over the conditions of forfeiture makes the right 'nonforfeitable'. This helps in understanding how various forms of deferred compensation are treated for estate tax purposes, especially when a direct interest under § 2033 is deemed terminable.
