Court Opinion

ID: 4634415
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:15:58.141133+00
Date Added: 2024-06-11T07:58:12.914666
License: Public Domain

LILLIAN O. FEHRMAN, EXECUTRIX OF THE ESTATE OF WILLIAM H. FEHRMAN, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Fehrman v. CommissionerDocket No. 87783.United States Board of Tax Appeals38 B.T.A. 37; 1938 BTA LEXIS 924; July 12, 1938, Promulgated *924  Petitioner's decedent was on a cash basis.  He was employed as store manager by the F. W. Woolworth Co. and received as compensation 10 percent of the net profits of the store as disclosed after taking inventory at the end of the year.  His contract of employment provided that in the event of his death settlement of his compensation might at the option of the company be deferred until after the next annual inventory, when his representative should receive as his share such proportion of 10 percent of the actual profits of the store as his term of service during the year should bear to the entire year.  Petitioner's decedent died August 14, 1934.  Pursuant to the option contained in the contract of employment, the company deferred payment of his compensation until January 1935, at which time it made payment to petitioner of a proportion of the store's profits calculated after the taking of the annual inventory at the close of 1934.  Held, the payment was not an amount accrued up to the date of decedent's death within the meaning of section 42, Act of 1934, and was not includable in his gross income.  Leo V. Cleary, Esq., and Clarence W. Nutt, Esq., for the petitioner. *925 Ralph F. Staubley, Esq., for the respondent.  KERN *37  This proceeding involves a deficiency in individual income tax for the final return of William H. Fehrman, deceased, for the period from *38  January 1 to August 14, 1934 (date of death), in the sum of $14,680.89.  The appeal is filed by Lillian O. Fehrman, executrix of the estate of William H. Fehrman.  FINDINGS OF FACT.  The facts herein were stipulated, with the exception of the ultimate finding.  They are as follows: 1.  The petitioner, Lillian O. Fehrman, as executrix under the last will and testament of William H. Fehrman, and duly qualified and appointed as such by the Probate Court of Cook County, Illinois, filed a final income tax return for William H. Fehrman covering the period from January 1, 1934 to August 14, 1934 inclusive.  2.  The taxes in controversy are individual income taxes for the said period, January 1, 1934 to August 14, 1934 inclusive.  3.  The decedent, William H. Fehrman, died August 14, 1934.  4.  The decedent, William H. Fehrman, was, during the year 1934 until the date of his death, August 14, 1934, and for several years prior thereto, employed by the*926 F. W. Woolworth Co. as store manager of the F. W. Woolworth Co. Store #1, located at 18 North State Street, Chicago, Illinois.  5.  The decedent and the said F. W. Woolworth Co. entered into a written contract covering the said employment of the decedent, Fehrman, dated the 22nd day of March, 1933, which said contract is attached hereto, identified as Exhibit "A" and made a part of this stipulation as if incorporated herein.  6.  In compliance with the terms of the said contract of employment the F. W. Woolworth Co. determined in January, 1934 the profits of Woolworth Store #1, 10% of which profits amounted to $55,066.68, which sum constituted the compensation of the decedent, Fehrman, for the services rendered in the year 1933.  The decedent, Fehrman, was paid $53,146.68 in January of 1934.  The difference between this payment and the profits due him amounting to $1,920.00 was paid as a weekly drawing account and insurance premium during the year 1933, and returned for income tax purposes during the year 1933.  7.  In preparing the final income tax return for the decedent covering the period January 1, 1934 to August 14, 1934, the executrix included the said $53,146.68 paid*927  by the F. W. Woolworth Co. in January, 1934 to the decedent, and paid an income tax of $9,486.45 thereon.  8.  The decedent regularly filed his income tax returns on a cash basis prior to 1934 and the same method of accounting was followed by the executrix in the preparation of the final return of decedent.  9.  In compliance with the terms of the said employment contract, the F. W. Woolworth Co. ascertained in January, 1935, that there was due the estate of William H. Fehrman $33,655.20, which was 15/24 of 10% of the net profits of the business of Woolworth Store #1, Chicago, Illinois, for the period from January 1, 1934 to December 31, 1934.  The F. W. Woolworth Co. deducted from the $33,655.20 the drawings made by decedent in the amount of $1,120.00, which was returned for income tax purposes by the petitioner during the year 1934, and paid the balance ($32,535.20) to the executrix of the estate of William H. Fehrman on January 18, 1935.  10.  The executrix filed an income tax return for the estate of William H. Fehrman covering the period from January 1, 1935 to October 25, 1935, and included in said return the said $32,535.20 paid the estate in January, 1935 and paid an*928  income tax of $4,447.17 thereon.  *39  11.  The F. W. Woolworth Co. takes an inventory and determines its net profits of the business derived from the sale of merchandise but once during the year, viz., as of December 31st of each year.  In accordance with this established practice said store #1 took its inventory as of December 31, 1934 and determined its net profits from the sale of merchandise during the year 1934, and subsequently in compliance with contract (Exhibit "A") the Chicago District office of the F. W. Woolworth Co. determined that Fehrman's legal representatives were entitled to 15/24 of 10% of the said profits of the said store for the year 1934.  12.  The books of account of the Chicago District office of the F. W. Woolworth Co. have therein an account designated "Managers".  A photostatic copy of this account relating to the account of the decedent, William H. Fehrman, for the year 1934 is attached hereto identified as Exhibit "B" and made a part of this stipulation as if incorporated herein.  13.  The credit to the manager's account of his share of the profits of his store, and the payment of the amount due the manager is actually made in January of each*929  year, although the entry is made on the books of the company as of December 31st of the preceding year.  Exhibit "A" is as follows: THIS AGREEMENT made in duplicate this 22nd day of March 1933 BETWEEN F. W. WOOLWORTH CO., a corporation duly organized under the laws of the State of New York, party of the first part, and W. H. Fehrman of the city of Chicago, State of Illinois, party of the second part.  WITNESSETH That the party of the second part agrees faithfully and diligently to work as Manager, agent and employee of the party of the first part in Store No. 1, City of Chicago, 22 N. State Street, State of Illinois, and at such other places as the party of the first part may designate, for the term of One (1) year from the 1st day of January, 1933, to January 1st, 1934, and continue from year to year unless terminated as hereinafter provided.  Party of the second part agrees that he will not unreasonably absent himself from his occupation during said term, without the consent of the party of the first part or its representatives.  He also agrees that during the term of this contract he will not be interested, directly or indirectly, in any other store or any other business*930  that will occupy his time during business hours.  He also agrees not to speculate on margin in stocks, cotton, grain, or securities, or enter into any game of chance for money, or other thing of value, or to make any wager on races, and that he will not become a bondsman or surety or security for any person whatsoever or make or endorse or sign any notes or bonds for any person whatsoever, during the continuance of this agreement, without the consent of the party of the first part.  The said party of the second part agrees carefully and honestly to attend to said business and to do and perform all the duties essential to efficient management of same as directed and advised by the party of the first part or its representatives.  The party of the second part hereby agrees to abide by the "Rules of Management of Stores," keep in a safe place all books, reports, lists, copies of leases, and other papers of a private nature, and allow no one to see these private papers except such persons as are authorized by the party of the first part; and also agrees that leases and reports or the contents of leases and reports will not be divulged or shown to anyone, except representatives of the*931  party of the first part.  *40  The party of the first part agrees to pay as compensation to the party of the second part, Ten per cent. (10%) of the net profits of the business derived from the sale of merchandise in the store managed by the party of the second part, after deducting the expenses of the business as hereinafter defined.  As a Drawing Account the party of the second part may draw from the receipts of the business a sum not exceeding Thirty-five Dollars ($35.00) at the end of each week, the same to be charged to his personal account and no sum in excess of this amount can be drawn without the consent of the party of the first part.  In case of the death of the party of the second part this contract shall terminate immediately.  Should the party of the second part be disabled or suffer from illness which detains him from said store, the party of the first part shall then have the right to employ another manager in the place and stead of the party of the second part, the cost of said manager and his salary shall be charge to the personal account of the party of the second part.  If absence is continuous for eight weeks this contract shall then terminate without*932  notice.  In the event of the death or disability of the party of the second part through which this contract is terminated as herein provided, the compensation of the party of the second part payable to him or his legal representatives shall be based on his percentage of the total net profits of the store for the year preceding the last inventory, pro rata for the time served, or at the option of the party of the first part, final settlement may be deferred until after the next annual inventory when the party of the second part or his legal representatives shall receive his share of the proportion of the actual profits of the store that his term of service during the year shall bear to the entire year.  It is further agreed that no part of this contract is assignable by the party of the second part.  IN WITNESS WHEREOF, party of the first part has caused this instrument to be signed by a duly authorized officer, and the party of the second part has hereunto set his hand and seal the day and year first above written.  [Signatures follow.] The amount of $32,535.20 paid to the executrix of the decedent's estate by the F. W. Woolworth Co. on January 18, 1935, did not accrue*933  to decedent during the period January 1 to August 14, 1934, had not accrued up to the date of decedent's death, and was not properly includable in decedent's gross income.  OPINION.  KERN: The sole question in this case is whether the sum of money paid to petitioner, as executrix of the estate of William H. Fehrman, by the F. W. Woolworth Co. in January 1935, representing 15/24 of 10 percent of the net profits of the business of Woolworth Store No. 1, Chicago, Illinois, calculated in that month for the year 1934 pursuant to the terms of the contract set out in our findings and being compensation for the services of petitioner's decedent during the period from January 1, 1934, to the date of his death, August 14, 1934, should have been included in the gross income of the decedent for that period pursuant to section 42 of the Revenue Act of 1934, *41  set out in the margin. 1 To state the question more succinctly, was this payment an amount accrued up to the date of decedent's death?  *934 The last sentence of the quoted section of the act, which is the part pertinent to this case, appears for the first time in the Revenue Act of 1934.  It was written into that act by Congress largely because decisions of this Board had held that, where a decedent was on a cash basis, income which had accrued but had not been actually received by decedent did not constitute income when finally received by his estate, but constituted a part of the corpus of the estate subject to the Federal estate tax.  ; ; ; . The legislative purpose in including this sentence in the Revenue Act of 1934 is indicated by the report of the Committee on Ways and Means of the House of Representatives to the Committee of the Whole House and the report of the Committee on Finance of the Senate on the Revenue Bill of 1934.  The pertinent part of the report of the Committee on Ways and Means is as follows: Sections 42 and 43.  Income accrued and accrued deductions of decedents: *935  The courts have held that income accrued by a decedent on the cash basis prior to his death is not income to the estate, and under the present law, unless such income is taxable to the decedent, it escapes income tax altogether.  By the same reasoning, expenses accrued prior to death cannot be deducted by the estate.  Section 42 has been drawn to require the inclusion in the income of a decedent of all amounts accrued up to the date of his death regardless of the fact that he may have kept his books on a cash basis.  Section 43 has also been changed so that expenses accrued prior to the death of the decedent may be deducted.  The report of the Finance Committee treats the matter as follows: Sections 42 and 43. Period for which deductions and credits taken.  The courts have held that income accrued prior to the death of a decedent on the cash basis is not income to his estate, and under the present law, unless such income is taxable to the decedent, it escapes income tax altogether.  By the same reasoning, expenses accrued prior to death cannot be deducted by the estate.  Sections 42 and 43 of the House bill were so drawn as to require the inclusion in the income-tax return for*936  the decedent of all items of income and deductions accrued up to the date of death regardless of the fact that the decedent may have kept his books on a cash basis.  The change made in section 43 is necessary to effectuate the policy adopted in the House bill in section 42.  By *42  reason of the proposed change such items as accrued dividends and interest on partially tax-exempt securities are permitted as a credit in computing the normal tax.  It is obvious from the language of the act and the legislative intent as disclosed by the committee reports quoted above that the purpose of Congress was to treat the income of a decedent as though he were on an accrual basis even though he was actually on a cash basis and kept his books on a cash basis, and that the phrase "amounts accrued up to the date of his death" means those amounts which would be properly included in a decedent's income if he were on an accrual basis as distinguished from a cash basis.  If petitioner's decedent had been on an accrual basis rather than a cash basis, would the amount paid to petitioner by the F. W. Woolworth Co. in January 1935 be properly considered as income accrued to the decedent at the date*937  of his death? It is our opinion that it would not.  Where a bonus or commission is earned by a taxpayer who is on an accrual basis, the amount of which is to be calculated by applying a percentage figure to net profits of a business as of the end of a year, the cases which hold that such bonuses or commissions constitute accrued income to the taxpayer for that year indicate that a condition precedent to such a holding is that the amounts be definitely ascertainable on the basis of facts ascertainable at that time and that the exact amount of the compensation be a mere matter of computation.  ; ; cf. . In the instant case the amount of the decedent's compensation for the period from January 1 to August 14, 1934, as paid by the F. W. Woolworth Co. (in an amount, time, and manner as provided for in its contract with decedent at its option) would not be ascertained at any time prior to the close of business December 31, 1934, nor were facts ascertainable prior to that date by which the amount of dededent's compensation for that period could have been*938  computed.  Therefore the amount of compensation for decedent's serivces from January 1 to August 14, 1934, paid by the F. W. Woolworth Co. to petitioner in 1935 was not an amount accrued up to the date of the death of petitioner's decedent.  Respondent has relied largely upon the cases of , and , for the proposition that the word "accrued" when used in the taxing statutes may have several meanings and should be construed in such a way as to make effective a clear legislative intent and to fairly reflect net income.  We do not question the language or result in either case.  They do not however impel us to reach a conclusion other than that which we have expressed.  Decision will be entered for petitioner.Footnotes1. SEC. 42.  PERIOD IN WHICH ITEMS OF GROSS INCOME INCLUDED.  The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period.  In the case of the death of a taxpayer there shall be included in computing net income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period. ↩