NEVILLE, District Judge.
The facts of this case are not in dispute. The question presented by cross motions for judgment is whether a surviving widow’s right to receive monthly payments for life and while unmarried pursuant to an employment contract entered into with a corporate employer by her deceased husband providing continuing payments to his widow after his death should be treated as property acquired from a decedent within the meaning of 26 U.S.C. § 1014(b) or as income in respect of a decedent within the meaning of 26 U.S.C. § 691(a).
On January 28, 1959, Haakon K. Nilssen entered into an employment contract with George A. Clark and Son, Inc. (Clark) under the terms of which Clark agreed to pay Mr. Nilssen not less than $54,000 annually during the term of his active employment with the company. If he remained with the company until retirement and rendered certain services after retirement he was to be paid $4,-500 a month for the remainder of his life. If his wife survived him, she was to receive monthly payments of $2,250 for the remainder of her life, provided
that in the event of her remarriage the payments would cease three months thereafter. The agreement to make these payments was stated to be an inducement for Mr. Nilssen to continue in Clark’s employ in light of his past and potential value to the employing corporation.
Nilssen died on October 28, 1963, while still in the active employment of Clark. In the estate tax return filed for his estate, the executor included the right to receive income under his contract with Clark, at a valuation of $245,503 computed pursuant to the provisions and actuary tables found in Regs. #20.2031-7. Pursuant to the provisions in the decedent’s contract, monthly payments were received totaling $4,500 in the year of the decedent's death and $27,000 in each of the following two years. In reporting this income, the widow treated her right to receive payments as “property acquired from a decedent”, and sought to amortize its accepted Federal Estate Tax value ($245,503) as a basis over a period equal to her starting date unmarried life expectancy. Accordingly, in her joint return for 1963, and her individual returns for 1964 and 1965, she excluded 75.2499% of the payments she received under the contract. The defendant completely disallowed the widow any basis in or for the contract, and assessed additional federal income taxes together with interest on those portions of the contract payments excluded in her income tax returns. These assessments were paid, and the present action arises from a denial of timely filed claims for refund.
Plaintiffs contend that the widow’s right under the employment contract, valued at its fair market value at the time of her husband’s death, was taxable to his estate under section 26 U.S.C. § 2039, and accordingly falls within the definition of “property acquired from a decedent” set out in § 1014(b) (9). Plaintiffs in effect are attempting to treat the widow’s right under the employment contract in some respects as though it were a capital asset, excluding from the widow’s income the date of death fair market value thereof, though regarding the excess of payments received over such assumed stepped up basis as ordinary income rather than as capital gain.
The defendant contends that regardless of whether* the contractual right to the payments was properly taxable under section 2039, the payments themselves are “income in respect of a decedent” within the meaning of 26 U.S.C. § 691; that by reason of the express exclusion contained in section 1014(c) the right to receive such payments is not properly considered “property acquired from a
decedent,”; and that the payments were properly treated as income in the hands of the widow, without any basis or stepped-up basis, and subject only to the deduction of the amount of estate tax paid attributable thereto as provided in section 691(c).
The court concludes that the payments represent section 691 income to the surviving widow, and that by reason of section 1014(c), the plaintiff is precluded from recovering or using the claimed basis. Although section 691 does not provide a definition of “income in respect of a decedent” the scope of its coverage may fairly be delimited by reference to the purpose for which it was enacted. That purpose was, and is, to avoid the “bunching” effect on the incomes of cash basis taxpayers whose final returns were placed on an accrual basis pursuant to section 42 of the Revenue Act of 1934. 48 Stat. 680. Thus the essential inquiry here is whether the payments represent income which may be said to have accrued to the deceased husband prior to his death. See S.Rep. No.1631, 77th Cong., 2d. Sess., 100-05 (1942).
In finding section 691 applicable to post-death payments made pursuant to a substantially similar employment contract, the court in Bernard v. United States, 215 F.Supp. 256 (S.D.N. Y.1963), stated at page 260:
“The critical question that must be answered is, who did the work or performed the services that gives rise to the income. If it is the decedent then such payments fall within Section 691 and are taxed to the recipient in the way that they would have been taxed to the decedent.”
Plaintiffs here do not suggest that the payments in question represent anything other than deferred compensation for services rendered by the deceased husband during his life. The payments are not gratuities, but rather are made in recognition of the decedent’s services rendered either prior to or subsequent to the signing of the contract in 1959. The surviving widow did not do anything to earn the payments, nor was she or anyone else required to do anything subsequent to her husband’s death in order to perfect his employer’s obligation to make the payments or her right to receive them.
Plaintiffs however contend that although the payments were made in recognition of the deceased husband's “economic activities”, the income may not be said to have accrued to him because he was not sufficiently “entitled” to the income prior to his death. This contention is based upon the fact that under the employment contract the deceased husband would never receive the payments in issue, such being conditioned upon the widow’s surviving his death. The principle upon which plaintiffs rely is not disputed. It is clear that a taxpayer must be entitled to income prior to its accrual at date of death, free from contingencies. Keck v. Commissioner of Internal Revenue, 415 F.2d 531, 533 (6th Cir. 1969); Trust
Company of Georgia v. Ross, 392 F.2d 694
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NEVILLE, District Judge.
The facts of this case are not in dispute. The question presented by cross motions for judgment is whether a surviving widow’s right to receive monthly payments for life and while unmarried pursuant to an employment contract entered into with a corporate employer by her deceased husband providing continuing payments to his widow after his death should be treated as property acquired from a decedent within the meaning of 26 U.S.C. § 1014(b) or as income in respect of a decedent within the meaning of 26 U.S.C. § 691(a).
On January 28, 1959, Haakon K. Nilssen entered into an employment contract with George A. Clark and Son, Inc. (Clark) under the terms of which Clark agreed to pay Mr. Nilssen not less than $54,000 annually during the term of his active employment with the company. If he remained with the company until retirement and rendered certain services after retirement he was to be paid $4,-500 a month for the remainder of his life. If his wife survived him, she was to receive monthly payments of $2,250 for the remainder of her life, provided
that in the event of her remarriage the payments would cease three months thereafter. The agreement to make these payments was stated to be an inducement for Mr. Nilssen to continue in Clark’s employ in light of his past and potential value to the employing corporation.
Nilssen died on October 28, 1963, while still in the active employment of Clark. In the estate tax return filed for his estate, the executor included the right to receive income under his contract with Clark, at a valuation of $245,503 computed pursuant to the provisions and actuary tables found in Regs. #20.2031-7. Pursuant to the provisions in the decedent’s contract, monthly payments were received totaling $4,500 in the year of the decedent's death and $27,000 in each of the following two years. In reporting this income, the widow treated her right to receive payments as “property acquired from a decedent”, and sought to amortize its accepted Federal Estate Tax value ($245,503) as a basis over a period equal to her starting date unmarried life expectancy. Accordingly, in her joint return for 1963, and her individual returns for 1964 and 1965, she excluded 75.2499% of the payments she received under the contract. The defendant completely disallowed the widow any basis in or for the contract, and assessed additional federal income taxes together with interest on those portions of the contract payments excluded in her income tax returns. These assessments were paid, and the present action arises from a denial of timely filed claims for refund.
Plaintiffs contend that the widow’s right under the employment contract, valued at its fair market value at the time of her husband’s death, was taxable to his estate under section 26 U.S.C. § 2039, and accordingly falls within the definition of “property acquired from a decedent” set out in § 1014(b) (9). Plaintiffs in effect are attempting to treat the widow’s right under the employment contract in some respects as though it were a capital asset, excluding from the widow’s income the date of death fair market value thereof, though regarding the excess of payments received over such assumed stepped up basis as ordinary income rather than as capital gain.
The defendant contends that regardless of whether* the contractual right to the payments was properly taxable under section 2039, the payments themselves are “income in respect of a decedent” within the meaning of 26 U.S.C. § 691; that by reason of the express exclusion contained in section 1014(c) the right to receive such payments is not properly considered “property acquired from a
decedent,”; and that the payments were properly treated as income in the hands of the widow, without any basis or stepped-up basis, and subject only to the deduction of the amount of estate tax paid attributable thereto as provided in section 691(c).
The court concludes that the payments represent section 691 income to the surviving widow, and that by reason of section 1014(c), the plaintiff is precluded from recovering or using the claimed basis. Although section 691 does not provide a definition of “income in respect of a decedent” the scope of its coverage may fairly be delimited by reference to the purpose for which it was enacted. That purpose was, and is, to avoid the “bunching” effect on the incomes of cash basis taxpayers whose final returns were placed on an accrual basis pursuant to section 42 of the Revenue Act of 1934. 48 Stat. 680. Thus the essential inquiry here is whether the payments represent income which may be said to have accrued to the deceased husband prior to his death. See S.Rep. No.1631, 77th Cong., 2d. Sess., 100-05 (1942).
In finding section 691 applicable to post-death payments made pursuant to a substantially similar employment contract, the court in Bernard v. United States, 215 F.Supp. 256 (S.D.N. Y.1963), stated at page 260:
“The critical question that must be answered is, who did the work or performed the services that gives rise to the income. If it is the decedent then such payments fall within Section 691 and are taxed to the recipient in the way that they would have been taxed to the decedent.”
Plaintiffs here do not suggest that the payments in question represent anything other than deferred compensation for services rendered by the deceased husband during his life. The payments are not gratuities, but rather are made in recognition of the decedent’s services rendered either prior to or subsequent to the signing of the contract in 1959. The surviving widow did not do anything to earn the payments, nor was she or anyone else required to do anything subsequent to her husband’s death in order to perfect his employer’s obligation to make the payments or her right to receive them.
Plaintiffs however contend that although the payments were made in recognition of the deceased husband's “economic activities”, the income may not be said to have accrued to him because he was not sufficiently “entitled” to the income prior to his death. This contention is based upon the fact that under the employment contract the deceased husband would never receive the payments in issue, such being conditioned upon the widow’s surviving his death. The principle upon which plaintiffs rely is not disputed. It is clear that a taxpayer must be entitled to income prior to its accrual at date of death, free from contingencies. Keck v. Commissioner of Internal Revenue, 415 F.2d 531, 533 (6th Cir. 1969); Trust
Company of Georgia v. Ross, 392 F.2d 694, 695 (5th Cir. 1967); Lacomble v. United States, 177 F.Supp. 373 (N.D. Cal.1959). However, this is not to suggest that such taxpayer must at any time have an absolute contractual right to its physical receipt.
Rather, in the ease of post-death payments solely attributable to the personal services of the decedent, the right to the income is fully created by the decedent during his life, and the right in someone surviving to receive the money has certainly matured without conditions precedent or contingencies at the time of his death. Under such circumstances the question of the decedent’s “entitlement” to the payments in the sense of actually receiving them in hand prior to his death is simply not relevant to a determination of whether the income may be said to be income in respect of a decedent.
«* * * The decedent here bargained for these payments in return for his personal services and for his remaining employed up to the date of his death. The consideration for those payments flowed entirely from him. He could have directed the payments to any person or entity he chose. He directed that they be paid to his widow, the contract being in essence a third-party beneficiary contract. Under the circumstances, with the decedent having furnished all of the consideration and economic benefit, it would be unrealistic in the extreme to hold that the income in question is not income in respect of a decedent, because the decedent chose to have it payable to someone other than himself or his estate.” Collins v. United States, 318 F.Supp. 382 (C.D.Cal., September 24,1970).
Contrary to plaintiffs’ contention the court finds no conflict in the authorities dealing with the issue presented here. The courts have uniformly held that post-death payments to an employee’s widow are to be treated as “income in respect of a decedent” despite the fact that under the terms of the employment contract, the employee would never be entitled to actual receipt of the income. Miller v. United States, 389 F.2d 656 (5th Cir. 1968); Collins v. United States, 318 F.Supp. 382 (C.D.Cal., September 24, 1970); Hansberry v. United States, 68-1 U.S.T.C. Par. 9185 (N.D.Ill., November 30, 1967); Bernard v. United States,
supra.
The court can find no compel
ling reason in the scheme of taxation which would compel it to discard these precedents. On the contrary, the construction sought by the plaintiffs here would produce the anomalous result referred to by the court in Bernard v. United States, supra, 215 F.Supp. at 260:
“It is not necessary that the decedent would have been entitled to the money had he lived. Otherwise all payments that commenced upon death would escape income tax.”
Plaintiff seeks to distinguish the cases referred to above on the grounds that the employment contracts involved therein did not contain the remarriage contingency to which her payments were subject. This appears to be a distinction without a difference. While the condition subsequent to plaintiff’s right under the contract may reasonably affect its valuation,
the essential nature of the payments remains unchanged. The payments were purely the fruit of Nilssen’s labors for Clark during his lifetime. At the time of his death the rights and obligations under his employment contract were fixed, the amount was reasonably capable of determination, and there was no substantial doubt as to collection or payment.
The income tax concept of a straight annuity, to take the simplest example, recognizes that during lifetime a person pays for a right to receive future payments after a stated number of years. He pays an annual deposit or premium with tax paid money, that is, money on which already he has paid his income tax. Years later, when the annuity matures, special rules under 26 U.S.C. § 72 permit the establishment of a basis, generally equivalent to the amount paid by the annuitant, and income tax is assessed against the receipt of only that portion of the matured payments as represent interest on the amounts paid over the years.
Quite the contrary in the case at bar where no basis of purchase or payment antedates death and the payments to the widow are new-sprung fresh income, so to speak. Were the income tax not to be assessed on such payments, the widow would receive money on which no income tax has been or would be paid. The payments received by the widow clearly are income with respect of a decedent and there simply is no basis, as there is with an annuity or a capital asset, to allocate to or to use against the receipt of the payments.
A separate order granting defendant’s motion of dismissal has been entered and this memorandum opinion will serve in lieu of findings as required by Rule 52 of the Federal Rules of Civil Procedure.