Before GOODRICH, KALODNER and STALEY, Circuit Judges.
When does the federal estate tax attach?
More specifically stated, when does such tax attach to a decedent-employee's contractual right to annual deferred compensation payments from his employer, payable to his estate after his death?
That problem, of first impression, is presented by this appeal by the government from a judgment in favor of the taxpayer, Eleanor D. Goodman, administratrix of the estate of Jacques Blum, deceased, in a suit brought by her in the District Court for the Western District of Pennsylvania to recover estate taxes and interest alleged to have been erroneously assessed and collected.
The District Court, subscribing to the taxpayer's contention, concluded as a matter of law that the decedent's contractual right was to be "* * * valued during decedent's lifetime and at the moment before death * * *" and made the factual finding that at such moment the contractual right was "valueless", for reasons which will subsequently be discussed. In its opinion the District Court stated "It must be admitted that if the value in the contracts is to be fixed the moment after death, then the Government is correct in its contention in this case." (emphasis supplied)*fn1
The undisputed facts may be summarized as follows:
The decedent, Jacques Blum, for several years prior to his sudden death of a heart attack at the age of 52 on May 2, 1947, was executive vice-president of Gimbel Brothers, Inc. ("Gimbels") in charge of its Pittsburgh store.
On October 19, 1944, June 1, 1945 and May 26, 1946, decedent entered into identical contracts of employment with Gimbel Brothers covering the years ending January 31, 1945, January 31, 1946 and January 31, 1947, respectively. Each contract provided for a basic salary of $50,000 per year, and for additional "contingent benefits" of $2,000 per year for fifteen years "after the employee ceases to be employed by the employer" by reason of death or otherwise. The post-employment "contingent payments" were to be made only if the employee duly performed the services agreed upon and did not engage in a competing business within a specified period after termination of his employment; and they were to be reduced if his post-employment earnings from a non-competing business plus the contingent payments exceeded seventy-five percent of his yearly average compensation under the contracts. Any of the fifteen annual contingent payments which fell due after the employee's death were to be paid to his estate, or to a nominee designated in his will.
The third contract for the period of employment ending January 31, 1947 was, by its terms, renewed on a month-to-month basis and was in effect at the time of decedent's death. At the latter time there was every prospect that he would continue to advance in his highly successful career in retailing.*fn2
After the decedent's death Gimbels paid the $6,000 annual installments provided by the three separate contracts ($2,000 each) to the taxpayer in her capacity as administratrix as they became due. She filed with the Collector a timely federal estate tax return and included the three contracts at a value of $15,000. Upon audit of the return the Internal Revenue Agent in Charge, Pittsburgh, increased the value of the three contracts from $15,000 to $66,710.34, the present worth of $90,000, payable in equal annual installments of $6,000 a year over a period of fifteen years. The increase in the value of the contracts resulted in a deficiency of $15,958.18, including interest, which was assessed against and paid by the taxpayer, and for the recovery of which she brought the suit here involved.
At the trial the taxpayer offered the testimony of three witnesses to the effect that the three contracts created no property right having any market value in the decedent while he lived.
The government offered the testimony of one witness who testified that the deficiency assessment was based upon his conclusion that the contracts created in the decedent valuable vested interests, subject to being divested, and on that theory the contracts were considered by the government to have the marketable monetary value which it had determined and assessed.
The federal estate tax is imposed upon "the transfer" of a decedent's property, Internal Revenue Code of 1939, sec. 810,*fn3 and the gross estate of the decedent is determined by including "the value at the time of his death of all property" to "the extent of the [decedent's] interest therein." Sec. 811(a).*fn4 Treasury Regulations 105, sec. 81.10 provide that the measure of value for the purpose ...