The opinion of the court was delivered by: DAWSON
These are cross-motions brought under Rule 56 of the Federal Rules of Civil Procedure seeking summary judgment. The plaintiff seeks a refund of certain income taxes paid by her for the years 1955 through 1957. The defendant seeks judgment dismissing the action. The applicable sections of the Internal Revenue Code are set out in the margin.
The parties have stipulated to all the material issues of fact.
On or about January 20, 1945, plaintiff's deceased husband, Jules E. Bernard (decedent), entered into two employment contracts with J. E. Bernard & Company, Inc. of New York and J. E. Bernard & Company, Inc. of Chicago (Corporations), each engaged in business as Custom House brokers. Decedent was employed by both Corporations. The contracts contain substantially similar provisions. In substance the Corporations agreed to employ the decedent for his natural life at fixed annual salaries, in addition to bonuses to be mutually agreed upon each year.
Under the terms of the contracts the Corporations agreed to pay the plaintiff (taxpayer) certain moneys upon the death of the decedent. The basis of the payments is the salaries and bonuses received by the decedent in the calendar year preceding his death. For each of the first two years following her husband's death the plaintiff would receive an amount equal to those salaries and bonuses. Following this two year period, the plaintiff, for the rest of her natural life, would receive annually an amount equal to one-half of those salaries and bonuses. Upon the death of the plaintiff the payments would continue in like amount to both or either of the surviving children. The contracts recite that these payments are 'in recognition of the services rendered by (decedent).'
Plaintiff's husband died on June 30, 1955. Salaries and bonuses paid to decedent in the calendar year 1954 amounted to $ 17,862.70. Plaintiff taxpayer received approximately an aggregate of $ 45,500 from the Corporations in 1955. 1956 and 1957. Such income was included in her income tax returns for those years and a tax of $ 20,195.38 paid based upon this income alone.
The value of the two contracts of decedent with the Corporations was included in decedent's estate for federal estate tax purposes. The District Director of the Internal Revenue Service ruled that the contracts were property includible in the decedent's gross estate and a value of $ 150,000 was placed upon them.
Claims for refund were filed by the taxpayer for $ 20,195.38 paid in 1955, 1956 and 1957 on income derived through the contracts. It is contended by plaintiff that, since the contracts were included as assets in the estate tax return of the decedent at a value of $ 150,000, the plaintiff was entitled to receive tax free an equivalent amount from the Corporations. On May 9, 1961 the District Director issued statutory notices of disallowance of plaintiff's claims. Plaintiff commenced suit to recover these amounts in April, 1962.
The sole issue confronting the Court is whether income to the taxpayer as a result of the contracts is 'income in respect of a decedent' as that term is used in Section 691 of the Internal Revenue Code. If so denominated the income is taxable to the plaintiff and a deduction allowed for the amount paid on the estate tax. Section 691(c). If such moneys are not income in respect of a decedent then the contracts have a basis of $ 150,000 and no income tax should be paid until that amount is exceeded. Section 1014.
Some historical background of Section 691 and its predecessor, Section 126 of the 1939 Code, is necessary to understand the congressional intent which led to its passage.
Prior to 1934, under the then existing revenue statutes, money earned by a taxpayer reporting on a cash basis which had not been received at the date of death, was not subject to income tax. In contrast, the taxpayer on the accrual basis was subject to tax on moneys earned but not collected before death.
To rectify this inequity, Congress passed Section 42 of the Revenue Act of 1934 which provided that the last return of every decedent should include amounts accrued up to the date of his death. The Supreme Court interpreted this section in Helvering v. Enright, 312 U.S. 636, 61 S. Ct. 777, 85 L. Ed. 1093 (1941). It said:
'Accruals here are to be construed in furtherance of the intent of Congress to cover into income the assets of decedents, earned during their life and unreported as income, which on a cash return, would appear in the estate returns. Congress sought a fair reflection of income. * * * The completion of the work in progress was necessary to fix the amount due but the right to payment for work ordinarily arises on partial performance. Accrued income under § 42 for uncompleted operations includes the value of the services rendered by the decedent, capable of approximate valuation, whether based on the agreed compensation or on quantum meruit.' 312 U.S., at p. 644, 61 S. Ct. at p. 782, 85 L. Ed. 1093.
The result of the Enright case was to bunch income of the decedent that might have extended over several years had he lived. Such bunching of income placed the decedent in a higher surtax bracket which was thought to be unfair. In 1942 Congress enacted Section 126 of the 1939 Code. This is the first time that the concept, 'income in respect of a decedent,' appears in any tax legislation. The section was designed to relieve the bunching effect but there is nothing to indicate that Congress intended thereby to allow any income to escape taxation altogether. The ...