Court Opinion

ID: 4627271
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:00:57.518133+00
Date Added: 2024-06-11T07:57:01.355734
License: Public Domain

UNITED STATES TRUST COMPANY OF NEW YORK, JEMIMA E. FLETCHER, AND ORLANDO E. SHIPMAN, AS EXECUTORS, ESTATE OF CHARLES H. FLETCHER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.United States Trust Co. v. CommissionerDocket No. 7856.United States Board of Tax Appeals9 B.T.A. 514; 1927 BTA LEXIS 2567; December 9, 1927, Promulgated *2567  A decedent entered into a five-year contract of employment wherein it was provided that so long as he might act as president of a company he should receive 22 per cent of the profits of the company, but that upon his death, or upon his ceasing to be president, the contract should be null and void, and that no one through him should have any right to anything from the company by way of any share of the profits which he had not drawn in his lifetime or otherwise.  Held that the amount of profits undrawn by him were not subject to estate tax as a part of his estate even though paid to his estate by the company, as a matter of grace, after his death.  Lee McCanliss, Esq., for the petitioners.  J. F. Greaney, Esq., for the respondent.  MURDOCK *514  This is a proceeding for a redetermination of a deficiency in estate tax in the amount of $581,266.55.  Two issues only are raised by the pleadings.  One is the alleged error of the Commissioner in including as a part of the decedent's gross estate an alleged gift of $254,510.17 made by the Centaur Company of New York to the estate of the decedent after his death.  The other is the alleged error of the*2568  Commissioner in including as a part of the decedent's estate funds in the amount of $2,922,992.50, belonging to trusts created by the decedent in his lifetime.  At the hearing the parties stipulated that of the amount of trust funds, $1,405,872.25 was properly included in the gross estate of the decedent, and the balance, or $1,517,205.25, was no part of this decedent's estate, and that the only question with respect to the gross estate before this Board is the amount, if any, to be included in the gross estate on account of the claim of the decedent against the Centaur Company for salary under his contract.  FINDINGS OF FACT.  The petitioners are the duly authorized executors of the estate of Charles H. Fletcher, deceased, who died on April 9, 1922, a resident of New York City.  At the time of his death and for many years prior thereto the deceased was president of the Centaur Company, incorporated under the laws of and having its principal office in the State of New York.  The deceased owned no stock in this corporation, all of its stock being owned by Anna B. Bliss and Mildred B. Bliss.  The corporation's *515  business was the compounding and sale of a proprietary medicine*2569  known as "Fletcher's Castoria." On November 24, 1917, the deceased entered into a contract of employment with the Centaur Company, which was in effect at the time of his death.  This contract contained the following provisions: FIRST: The Centaur Company hereby covenants that it will pay to said Charles H. Fletcher as compensation for his services as President of said Company, during the years 1918, 1919, 1920, 1921, and 1922, or such of said years as said Charles H. Fletcher may act as President of said Company, an amount in each year equal to twenty-two (22) per cent. of the net income or profits of said Company for each of said years respectively.  Said Charles H. Fletcher shall further be entitled to draw his said share of profits in monthly payments in each year.  Said Charles H. Fletcher shall, in the event of sickness or other disability, have the right to terminate this agreement at the date of any regular yearly meeting.  SECOND: Charles H. Fletcher expressly covenants and agrees that in the event of his death, or upon his ceasing to be President of said Company, this contract shall thereupon be null and void, and said Fletcher hereby covenants that he, his heirs, *2570  executors, personal representatives and assigns shall at the time of his death, or upon his ceasing to be said President, be entitled to nothing whatsoever from said The Centaur Company by virtue hereof.  He further hereby relinquishes, releases and holds harmless said Company for any share of said profits which he may not have drawn at the time of his death or to the time of his ceasing to be said President, and which he would have been entitled to draw had he lived or continued to act as President.  Said Fletcher hereby expressly waives the right to any accounting by his heirs, executors, personal representatives and assigns, and hereby covenants that they shall demand nothing from said Company, as nothing will be due him hereunder or otherwise in either of said events, and that they shall demand no right to examine the books or accounts of the said Company in either of said events, either at law or in equity.  Any sum which may be paid to the estate of said Charles H. Fletcher or his personal representatives by said Company will be paid as matter of grace and not of right by virtue of these presents.  THIRD: Said Fletcher hereby covenants to give his time and ability to the duties*2571  of his office as President of The Centaur Company as may be required to diligently prosecute its business pursuant to the by-laws of said Company and the direction of its board and executive committee.  FOURTH: This agreement shall bind the parties hereto, their successors, heirs, executors and personal representatives and assigns, respectively.  Other similar contracts had been in effect during prior years but at the date of the decedent's death this contract alone and without modification was in effect.  Fletcher had a drawing account on the books of the corporation.  As fast as the company made money which it did not need in the business it transferred it to the drawing accounts, deposited it in the Park Bank, and Fletcher disposed of it, 22 per cent to himself and 78 per cent to the stockholders.  At the end of each year the amount due him for that year would be credited to him.  There was always *516  something due him at the end of each year and as the money came in during the next year he would draw out his share.  It frequently happened that he did not draw out all the money to which he was entitled for one year until April or May of the following year.  For some*2572  time prior to Fletcher's death the company had been putting aside some money as a reserve for the payment of its income taxes.  At the date of the decedent's death he had not drawn all of his share of the net profits of the company which he was entitled to draw under his contract.  After his death it was determined that 22 per cent of the net profits of the company from the date of the contract up to the time of his death exceeded his drawings up to that time by $254,510.17.  On April 25, 1922, the board of directors of the Centaur Company passed the following resolution: WHEREAS, under the terms of the agreement of The Centaur Company with Charles H. Fletcher, now deceased, dated November 24, 1917, the said Charles H. Fletcher, was entitled to receive twenty-two (22%) per cent of the subsequent net profits of the Company by way of annual compensation for his services as President, but it was thereby provided that, in the event of his death, without having drawn his full compensation, his estate should have no claim upon the Company in excess of his drawings during his life time; Now, THEREFORE, RESOLVED, that there be paid to the Executors of the said Charles H. Fletcher, *2573  as a matter of grace and not as a matter of right in appreciation of the services rendered by him to the Company during his life time, a sum which, with his drawings during his life time, shall equal twenty-two (22%) per cent of the net profits of said Company at the date of his death, upon receipt from his executors of a General Release running to the said Company and or to the stockholders thereof, in a form to be approved by the counsel of the Company.  Thereafter on July 27, 1922, the Centaur Company sent the following letter to the petitioners: JULY 27, 1922.  ESTATE OF CHAS. H. FLETCHER To Mrs. Jemima E. Fletcher, The United States Trust Company and Mr. Orlando E. Shipman as Executors of Chas. H. Fletcher, deceased.  DEAR MADAM AND SIRS: - By the terms of a certain agreement in writing dated November 24th, 1917, made between THE CENTAUR COMPANY and the late MR. CHAS. H. FLETCHER, said Company agreed that it would pay Mr. Fletcher as compensation for his services as President, during the years 1918 to 1922, inclusive or during such of said years as the said Chas. H. Fletcher might act as President of said Company, an amount in each year equal to twenty-two*2574  (22%) per cent of the net income or profits of said Company.  *517  It was further provided that Mr. Fletcher should be entitled to draw his share of profits in monthly payments.  By the same contract, it was declared that in the event of the death of Mr. Fletcher, or of his retirement from the office of President, the contract should be null and void, and Mr. Fletcher covenanted that, in the event of his death or ceasing to be President, neither he nor his representatives should be entitled to any compensation under the terms of the contract.  By such contract it was further provided that "he," Mr. Fletcher "further hereby relinquishes, releases and holds harmless said Company for any share of said profits which he may not have drawn at the time of his death or to the time of his ceasing to be said President, and which he would have been entitled to draw had he lived or continued to act as President.  Said Fletcher hereby expressly waives the right to any accounting by his heirs, executors, personal representatives and assigns, and hereby covenants that they shall demand nothing from said Company, as nothing will be due him hereunder or otherwise in either or said events, *2575  and that they shall demand no right to examine the books or accounts of the said Company in either of said events, either at law or in equity.  Any sum which may be paid to the estate of said Charles H. Fletcher or his personal representatives by said Company will be paid as matter of grace and not of right by virtue of these presents." In order that there may be no possible misapprehension as to the terms of the agreement, we respectfully refer you to the original counterpart thereof, which is in your possession, and also to the counterpart, in your possession, of another contract dated November 20th, 1917, between THE CENTAUR COMPANY and others and Mr. Fletcher, which casts some light upon the method in which the net income and profits of the Company were to be computed.  The books of THE CENTAUR COMPANY have recently been examined and audited by Messrs. S. H. & Lee J. Wolfe, consulting actuaries, auditors and accountants, of this City, who have reported to this Company under date of July 20th, 1922, that at the date of the death of Mr. Fletcher on April 8th, 1922, there remained undrawn a balance of $254,510.17 of the twenty-two (22%) per cent of the net profits of the Company*2576  to which he would have been entitled under the foregoing contract but for the event of his death.  For the above sum, as we construe the contract above referred to, Mr. Fletcher's Estate has no enforcible claim against this Company, but as a matter of grace, and not of right, and as evidence of the appreciation by this Company of the great value of the services rendered to it by Mr. Fletcher in his life time, this Company desires to pay to his estate the full sum to which Mr. Fletcher would have been entitled as of April 8th, 1922, had he survived the period and continued to act as President.  I beg to notify you, therefore, that in behalf of THE CENTAUR COMPANY I shall be prepared to pay to the Estate of the late Mr. Fletcher on September 6th, 1922, the said sum of $254,510.17, upon the receipt from the executors of Mr. Fletcher of a general release running from his Estate to the Company, and of a waiver and consent to such payment to be made by, or in behalf of, the Tax Commission of the State of New York.  Yours Truly, THE CENTAUR COMPANY, President.It does not clearly appear whether prior to the receipt of the above letter the executors or the heirs of Charles H. *2577  Fletcher had or had not made any claim against the Centaur Company for money due the deceased on account of his undrawn salary.  Thereafter, the *518  attorney for the executors prepared an agreement of which the following were the pertinent provisions and which was signed on December 29, 1922, at which time $254,510.17 was paid to the executors by the Company: WHEREAS, the said Charles H. Fletcher died on or about April 9th, 1922, and his will was duly probated in the surrogates' Court, New York County, N.Y. on April 25th, 1922, and letters testamentary duly issued on April 26th, 1922, to the aforesaid parties of the second part hereto, and WHEREAS, the said Charles H. Fletcher, deceased, was at the time of his death president of The Centaur Company and entitled to receive compensation for his services to it as provided in a contract between the said Charles H. Fletcher and The Centaur Company dated November 24th, 1917, and WHEREAS, by a contract likewise dated November 24th, 1917, between The Centaur Company, first party, the said Charles H. Fletcher, second party, Anna B. Bliss, third party and Mildred B. Bliss, fourth party, provision was made for the payment of any*2578  additional federal Income Taxes and War Excess Profits taxes for the year 1917 and subsequent years on account of any earnings of the first party distributed to the second, third and fourth parties, and WHEREAS, the Board of Directors of the party of the first part duly passed a resolution on or about April 25th, 1922, a copy of which is hereto attached as "Exhibit A" and thereafter a letter was written to the parties of the second part by the party of the first part dated July 27th, 1922, a copy of which is hereto attached as "Exhibit B," and WHEREAS, the parties hereto desire at this time to adjust and liquidate all claims of every kind which they may have the one against the other, Now, THEREFORE, THIS AGREEMENT WITNESSETH: That the said parties hereto in consideration of the mutual covenants herein contained and set forth and of the payment by the party of the first part of the sum of Two Hundred and Fifty-four thousand Five hundred and ten and 17/100 dollars ($254,510.17) to the parties of the second part, the receipt whereof is hereby acknowledged, agree as follows: The said The CentaurCompany party of the first part and Jemima E. Fletcher, Orlando E. Shipman and United*2579  States Trust Company of New York as executors of the will of Charles H. Fletcher, deceased and not otherwise, parties of the second part, do hereby remise, release and forever discharge each the other of and from all claims, demands, obligations and liability whatsoever on account of any and all business dealings and transactions which the deceased may have had with or in connection with the said The Centaur Company and of and from all and all manner of action actions, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, claims and demands whatsoever in law or in equity which against the one of the aforesaid parties hereto its successors or their estate the other ever had, now has or which either of said parties hereafter can, shall or may have against the other for, upon or by reason of any matter, cause or thing whatsoever from the beginning of the world to the day of the date of these presents.  The estate-tax return for the estate of Charles H. Fletcher, deceased, was filed with the collector of internal revenue at New York on December 14, 1922, showing total tax due in the amount of $237,057.64.  The $254,510.17*2580  was not reported as a part of the *519  gross estate.  Along with the return there was filed a letter from the executors to the Commissioner of Internal Revenue requesting an early determination of the tax, in accordance with section 407 of the Revenue Act of 1921.  The executors were first notified of the determination of any tax in a letter dated December 14, 1923, received December 21, 1923.  No tax was paid until a few days before the tax was due.  The Commissioner included the $254,510.17 in the gross estate and notified the executors that tax was due in the amount of $819,297.45.  Thereupon a claim for abatement was filed and the final letter from the Commissioner from which this proceeding resulted, rejected the claim for abatement in large part and allowed it in a small amount.  OPINION.  MURDOCK: At the hearing and in his brief counsel for the petitioner mentioned some contention in regard to the executor's demand for determination of the amount of tax and discharge from personal liability therefor in accordance with section 407 of the Revenue Act of 1921, but since no such issue was raised by the pleadings, we will dismiss the matter without further discussion. *2581  The respondent in his answer denied that his letter of August 8, 1925, was a deficiency letter and alleged that since the enactment of the Revenue Act of 1924, there has been no determination of a deficiency within the meaning of that Act, and that consequently this Board had no jurisdiction in the case.  The respondent did not refer to this contention in his oral argument or in his brief.  We can see no merit in his position and we are satisfied that we have jurisdiction.  There is one issue to be decided on its merits.  The respondent contends that the estate of the decedent had a right to the $254,510.17 which it eventually received, which right it could have enforced, and that consequently the amount was properly included in the gross estate by authority of section 402(a) of the Revenue Act of 1921.  If this contention should prove unsound he then contends that the amount was properly included in the gross estate in accordance with section 402(c), inasmuch as the decedent made a transfer of the amount to the Centaur Company without a fair consideration in contemplation of or intended to take effect in possession or enjoyment at or after his death.  We shall discuss the alternative*2582  contention first.  It seems wholly without merit.  The contract which alone could have made the transfer was entered into on November 24, 1917.  It supplanted another similar contract dated 1912, and the letter was not the first of the kind between the parties.  A witness who had been with the company *520  for many years and who knew the deceased stated that he had always understood that the peculiar terms were inserted in these contracts following the death of a profit-sharing officer in 1904, at which time the heirs or representatives of that deceased officer had given the company considerable annoyance by insisting upon their right to examine into the profits of the company, as disclosed in its books.  Under the circumstances it does not appear that Fletcher did what he did prompted by the apprehension of death within the reasonably near future, arising from some existing bodily condition.  . Furthermore, in our opinion, the deceased never transferred anything to the Centaur Company by the contract.  The money which was undrawn never became his and certainly in 1917, when he signed the contract, *2583  he transferred no right or property which he then had or owned.  The contract has been the subject of a suit in the State of New York, and the learned court which decided the case, in reaching the same conclusion as we have reached, discussed this point at length.  See ; and see also the decision of the New York Court of Appeals; . We fail to see, in the evidence before us, any reason for holding that all or a part of the undrawn salary was transferred as a part of the decedent's estate at his death, or that it was subject to the payment of charges against his estate or to distribution as a part of his estate.  The weight of the evidence is the other way.  The petitioner introduced a contract and some evidence that there was no other.  Thus he made a prima facie case, at least.  Another contract between Fletcher and the stockholders of the Centaur Company was mentioned by a witness and some such contract is also referred to in the letter written by the company to the executors dated July 27, 1922, and in the final release.  But so far as we know*2584  such contract or contracts does or do not affect the question before us.  If Fletcher agreed that money could be set aside for the payment of income taxes, how could he or his estate he heard to complain if money was so set aside?  Was such a plan not within his contemplation when he signed the employment contract?  Also did he not know when he signed this latter contract that it would take some months after the close of a year to determine and to draw his share of the profits? The mere fact that he was not derelict in drawing his share would not move a court to enforce the payment to his estate of the portion which he had not drawn.  It does not appear that the company ever did anything against Fletcher's wishes or without his consent.  *521  The respondent relies upon the fact that a release was demanded and given, and upon the admission of counsel for the petitioner that the executors made some sort of a demand upon the company, to show that the estate really had a right to receive all or a part of this money from the company either as undrawn salary, or for the use of Fletcher's name.  This does not seem logical.  The assertion of an alleged right does not establish any*2585  right.  The fact that a release was demanded, given, and received does not seem unusual or inconsistent with the petitioner's contention, and certainly it is inconclusive.  Suppose the act of the corporation giving the undrawn salary to the Fletchers was ultra vires, does that fact subject the money to an estate tax?  The evidence does not justify us in going beyond the plain terms of the contract, and our judgment must be for the petitioner, because by the terms of the contract this estate got nothing.  The amount in question was not a part of the estate transferred on the death of the owner.  . Reviewed by the Board.  Judgment will be entered on notice of 15 days, under Rule 50.