Rollert Residuary Trust v. Commissioner

*620 OPINION

Respondent determined deficiencies in petitioner's Federal income taxes in the amounts of $ 83,795 for 1973; $ 68,686 for 1974; and $ 2,675 for 1975.

This case was submitted fully stipulated under Rule 122, Tax Court Rules of Practice and Procedure. The primary issues for decision are: (1) Whether rights to receive bonus payments under the General Motors bonus plan, which were attributable to an individual's employment*106 with General Motors before his death but which were not formally awarded until several months after his death, are rights to income in respect of a decedent; and (2) whether rights to income in respect of a decedent which were distributed by the decedent's estate to petitioner in prior years acquired a basis in the hands of petitioner equal to their fair market value on the date of distribution. With respect to this second issue, we must specifically decide whether the rights to income in respect of a decedent were amounts "properly paid or credited" for purposes of sections 661(a)(2)¹ and 662(a)(2). The second issue applies to post-death installments of bonus awards made prior to death, concededly income in respect of a decedent, as well as the postmortem bonus awards (issue 1), if we determine issue (1) in respondent's favor.

On December 31, 1960, Edward D. Rollert, as settlor, and Genesee Merchants Bank*107 & Trust Co., as trustee, executed a revocable trust agreement (hereinafter trust agreement). This trust agreement provided for the establishment of two separate trusts -- a marital trust and a residuary trust -- to administer assets owned by Mr. Rollert at death. The residuary trust is the petitioner herein. When the petition was filed, the principal place of business of the trustee was Flint, Mich.

*621 For several years prior to his death on November 27, 1969, Edward D. Rollert had been employed as an executive vice president of General Motors Corp. and had participated in the corporation's stock option plan and its bonus plan. These plans were designed to compensate corporate executives and other employees by providing cash and stock bonuses payable in installments in subsequent years. Amounts awarded under the plans were interrelated: if an employee was awarded a stock option bonus, any award under the bonus plan was reduced. All awards under the bonus plan for more than $ 2,000 were to be paid in cash or stock in annual installments over a 5-year period following the year of award. Bonuses under the stock option plan were in the form of contingent credits for General*108 Motors stock. After the termination of stock options concurrently awarded to the executive, the contingent credits would entitle the executive to receive the stock. Like the bonuses under the bonus plan, the contingent credits under the stock option plan were credited in installments over a 5-year period. However, the period for applying the contingent credits started running from the date the options were terminated. Mr. Rollert's options terminated within 12 months after his death.

During the period between the award of bonus rights under either of these plans and the employee's receipt of the final installment payment attributable to such rights, the employee had to "earn out" his or her right to the award by continuing to be employed by the corporation and not committing acts inimical to the best interests of the corporation. Death relieved an employee from the duty of earning out a bonus; thus, upon an employee's death, his or her estate, or the party entitled to the right, possessed a nonforfeitable right to subsequent installments of the bonus award.

General Motors made awards to Mr. Rollert under both the bonus plan and the stock option plan for each of the years 1964*109 through 1968. These awards, which exceeded $ 300,000 for each of these years, are referred to collectively as the "lifetime bonus awards." When Mr. Rollert died on November 27, 1969, the remaining installment payments of these bonuses became nonforfeitable and payable to Mr. Rollert's estate.

Shown on page 623 is a copy of Joint Exhibit 6-F listing the *622 following information with respect to lifetime bonus awards made to Mr. Rollert:

(A) Year of award determination. -- This shows the year in which the lifetime awards were determined.

(B) Year of receipt. -- This shows the year in which installments of lifetime bonus awards were paid by General Motors and received by the Estate of Edward D. Rollert (hereinafter the estate) or petitioner. Lifetime bonus awards received in cash are so recorded; those received in stock are shown with the number of shares and the fair market value at delivery indicated.

(C) Year of final installment. -- This shows the year in which the final installment of each lifetime bonus award was paid or delivered.

On March 2, 1970, decedent was awarded a bonus under the bonus plan of 1,786 shares of General Motors common stock and $ 285,763*110 cash with respect to his almost 11-months employment with the corporation in 1969. This is referred to hereafter as the "postmortem bonus award." The parties have stipulated that decedent "had no rights to the post-mortem bonus award during his lifetime." This bonus was to be paid in five annual installments, with the first installment in March 1970, and the subsequent installments on January 10 of the next 4 years. The installments for 1970, 1971, 1972, and 1973 each consisted of $ 57,168 cash and 357 shares of General Motors stock. ² For 1974, the installment consisted of $ 57,090 cash and 358 shares of stock. No award was made to Mr. Rollert under the stock option plan with respect to his employment in 1969.

The procedures for awarding bonuses under the bonus plan to an executive vice president, such as Mr. Rollert, were the same as those with respect*111 to other employees. The bonus plan stated that it was contemplated that bonuses would be awarded annually but that the committee had the right from time to time to modify or suspend the plan. Bonuses were awarded under the bonus plan in all the years 1956 through 1969, and it was the practice during this period to grant awards to all executive vice presidents. *623 INSTALLMENTS OF BONUS AWARDED DURING LIFETIME BUT PAID AFTER DEATH

[Discrepancies in the above Joint Exhibit were not addressed by the parties.]

*112 [Discrepancies in the above Joint Exhibit were not addressed by the parties.]

[Discrepancies in the above Joint Exhibit were not addressed by the parties.]

[Discrepancies in the above Joint Exhibit were not addressed by the parties.]

*624 The first step to be taken in each year in deciding whether to award bonuses under the bonus plan was for the corporation's independent public accountants to determine an amount to be set aside in a reserve to be used to pay any bonuses that might be awarded*113 under the two plans. The amount set aside was computed under a formula based generally on the corporation's net earnings, but the corporation's bonus and salary committee (hereinafter the committee) had discretion to direct that a lesser amount be credited. For the year 1969, an initial determination of the amount available for payment of bonuses was made on October 6, 1969, approximately 1 1/2 months prior to Mr. Rollert's death. This determination was reviewed monthly until February 2, 1970, when it was accepted as final.

The second step in awarding bonuses was the selection of eligible employees for awards under the bonus plan. To do this, the committee designated a monthly salary rate, and with a few exceptions, all employees earning in excess of that rate were considered for bonuses in that year. On November 3, 1969 (again prior to the date of death), the committee made a tentative determination of awards for all executive vice presidents, including Mr. Rollert. This determination was reviewed monthly until finalized on March 2, 1970. During the review on January 5, 1970, the committee decided to make an award on account of Mr. Rollert's service despite his death but reduced*114 it to an amount roughly equivalent to 11/12ths of the amount originally determined. This accorded with the committee's practice of prorating awards on the basis of the amount of actual service during the year. On March 2, 1970, the award for Mr. Rollert's 1969 service was formally made. It was for the amount determined on January 5, 1970.

The provisions of the bonus plan stated that an employee would be eligible for consideration for a bonus in the year his or her employment terminated, at the discretion of the committee and under such rules as the committee might prescribe. As of the date of decedent's death, the committee had prescribed no rules dealing with the awarding of bonuses to employees who had died during the award year; but it had been the committee's practice, generally, to treat eligible employees who had at least 2-months active service in the award year the same as employees not terminating their service. Thus, the committee would deny a postmortem award *625 to an employee with at least 2-months service in the award year only if his performance had declined to the extent that he would not have been given an award if he had lived, or if he had acted or conducted*115 himself in a manner inimical or in any way contrary to the best interests of the corporation. None of these exceptions applied to Mr. Rollert.

Mr. Rollert did not report on his pre-death income tax returns any of the bonus awards at issue here. Nor were any of these amounts reported in Mr. Rollert's final individual income tax returns.

Mr. Rollert executed his last will and testament on March 14, 1961. After he died, this will was admitted to probate. The executor of the estate, Genesee Merchants Bank & Trust Co. performed the administration of the estate and filed the U.S. Estate Tax Return, Form 706, for the estate. This return included in the gross estate the date-of-death values of the installments of the lifetime bonus awards that had not been paid or delivered to Mr. Rollert as of the date of death, but it did not include the postmortem awards. The date-of-death values for both the stock and cash portions of the lifetime bonus awards were discounted values, reflecting the fact that the amounts were not to be delivered until future years.

The will made certain specific bequests of property, and devised the residue to the marital and residuary trusts created under the trust*116 agreement. None of the rights to receive future installments of lifetime or postmortem bonus awards were subject to distribution as a specific bequest. All these rights to installments of bonus awards were administered as part of the residue of the estate and were subject to distribution to petitioner under the residuary clause of the will. The bonus plan and the stock option plan did not permit the assignment by a deceased employee's estate of the rights to receive future bonus installments except that the estate could transfer such rights to the party entitled to them as testamentary beneficiary or heir.

During the administration of the estate, the executor made five separate distributions to petitioner of certain of the rights to receive cash or stock due in subsequent years as installments of lifetime bonus awards, and a distribution of the right to the final installment due under the postmortem bonus award. These six distributions included a December 30, 1970, *626 distribution of the right to receive 1,446 shares of General Motors stock on January 10, 1973; a December 30, 1970, distribution of the right to receive $ 73,500 on January 10, 1973; a December 21, 1971, distribution*117 of the right to receive 1,446 shares of General Motors stock on January 10, 1974; a December 22, 1972, distribution of the right to receive 925 shares of General Motors stock on January 10, 1975; a December 22, 1972, distribution of the right to receive $ 57,090 on January 10, 1974; and a December 31, 1973, distribution of the right to receive 358 shares of General Motors stock on January 10, 1974. Each distribution of a right to receive future bonus installments was made prior to the year in which payment or delivery of the installment was due.

To record these six distributions of the rights to receive bonus installments, the estate and petitioner each made book entries for deliveries or receipts of "accounts receivable." No other act of transfer occurred between the estate and petitioner.

Each of the distributions of the rights to future bonus installments was treated by the estate and petitioner in essentially the following manner. With respect to each right that was distributed, the present value of the right was determined as of the date of distribution. The estate claimed a distribution deduction for this amount on its U.S. Fiduciary Income Tax Return, Form 1041. Petitioner*118 reported on its U.S. Fiduciary Income Tax Return, Form 1041, for the year of distribution the same value as gross income received from the estate. In each of the years in which rights to bonus installments were distributed, the estate had distributable net income, as defined in section 643, consisting primarily of bonus installments actually received by the estate in that year. ³ For each year, the amount of distributable net income exceeded the total of the correct date-of-distribution value of rights to future bonus installments plus the amount of cash distributions which were made in each of these years to the marital trust.

In the subsequent years, when the bonus installments were due, General Motors paid them directly to petitioner. Petitioner *627 reported on its income tax return as ordinary income only the amount, if any, by which*119 the bonus installment paid to it by General Motors exceeded the corrected value of the right to the bonus installment as of the date the right was distributed to it. ⁴ Due to fluctuations in stock prices, two of the bonus installments had values lower than the bases previously assigned to the rights to these installments. Petitioner claimed no losses in these instances. The estate did not include in income any portion of the bonus installments that were paid directly to petitioner.

*120 The following description of the treatment by the estate and petitioner of the stock portion of the distribution on December 30, 1970, illustrates how the distributions of the rights were treated. On December 30, 1970, the executor distributed to petitioner the right to receive future payment and delivery of the bonus installment of 1,446 shares of General Motors common stock which was payable and deliverable by General Motors to the estate on January 10, 1973. Both the estate and petitioner used $ 92,941 as the value as of December 30, 1970, of this bonus right. The estate claimed a distribution deduction of $ 92,941 on its income tax return, and petitioner reported $ 92,941 on its income tax return. The trustee subsequently made an adjustment on the books of petitioner to increase the reported present value of the right distributed to it as of December 30, 1970, from $ 92,941 to $ 108,242, which was the correct present value of the right as of December 30, 1970. On January 10, 1973, General Motors paid the installment due on that date by delivery of the 1,446 shares of common stock to petitioner. As of this date, the total fair market value of the 1,446 shares was $ 119,476. *121 Petitioner reported on its 1973 income tax return $ 11,234 as a receipt of ordinary income. This amount represented the difference between the fair market value of the stock on January 10, 1973 ($ 119,476), and the corrected December 30, 1970, present value of the right to *628 receive the stock ($ 108,242). The estate reported no gain or income with respect to this payment either in 1973, when the installment of the bonus award was paid to petitioner, or in any other year.

Respondent examined petitioner's income tax returns for the years 1973, 1974, and 1975, and determined deficiencies in each of these years. When the notice of deficiency was issued to petitioner on September 6, 1979, petitioner had no right to file for refund with respect to the years 1970, 1971, and 1972. It has been respondent's position that the distribution of the rights to the lifetime and postmortem bonus installments were income in respect of a decedent, that receipt of these installments did not give petitioner any basis in these rights, and that petitioner therefore had to include as income the entire amount of each bonus installment when paid to it. In computing the amounts of deficiencies, *122 respondent did not allow any deductions under section 691(c) for estate taxes paid with respect to the lifetime bonus awards. On brief, respondent concedes that to the extent petitioner must include in its gross income items of income in respect of a decedent, a deduction under section 691(c) should be allowed for the Federal estate tax paid with respect to such income. Respondent also states on brief that if the Court finds that the contested bonus installments were income in respect of a decendent, then the maximum tax rates under section 1348 will apply in computing the amounts of deficiencies owed by the petitioner.

The first question we must resolve is whether the bonus payments were income in respect of a decedent under section 691.

In its answering brief, petitioner for the first time suggests that installment payments of the contingent credits awarded under the stock option plan might not constitute income in respect of a decedent. However, in paragraph 6(1) of its amended petition, petitioner conceded that the rights to the installment payments of the lifetime bonus awards were rights to *123 income in respect of a decedent, and the case was initially briefed by both parties on this basis. Petitioner cannot now *629 raise a new issue by arguing contrary to the conceded facts. See, e.g., Sicanoff Vegetable Oil Corp. v. Commissioner, 27 T.C. 1056, 1065-1066 (1957), revd. on another issue 251 F.2d 764 (7th Cir. 1958).

We are, however, squarely faced with the issue whether payments of the postmortem bonus award were income in respect of a decedent. Petitioner argues that Mr. Rollert had no right or entitlement to a bonus award with respect to his employment in 1969 since the bonus was not formally awarded by General Motors until March 2, 1970 -- over 3 months after his death. We disagree. For purposes of section 691, we believe that as of the date of his death, Mr. Rollert had a right to a bonus award for 1969, in view of General Motors' established practices in awarding bonuses and its tentative decisions to assign substantial funds to the bonus pool for 1969 and to award bonuses to all executive vice presidents.

Section 691(a) provides that gross income of an estate shall include all income in respect of *124 a decedent, but nowhere in the Code is this phrase defined. The only definition appears in section 1.691(a)-1(b), Income Tax Regs., ⁵ but this definition does little to clarify the meaning of the term. Thus, the courts have frequently been called upon to establish the dimensions of the term. Estate of Peterson v. Commissioner, 74 T.C. 630, 638 (1980), affd. 667 F.2d 675 (8th Cir. 1981).

*125 In determining whether particular receipts should be treated as income in respect of a decedent, courts have focused on whether the decedent had a right or entitlement to receive income as of the date of his death. Estate of Peterson v. Commissioner, 667 F.2d at 679, and cases cited therein. The *630 parties have stipulated in this case that Mr. Rollert "had no rights to the post-mortem bonus award during his lifetime." Respondent takes the position that for purposes of the stipulation, the term "rights" should be read as referring to contract rights or other legally enforceable rights, and that the stipulation establishes only that the decedent had during his lifetime no legally enforceable right to an award not yet made. Petitioner contends, however, that the stipulation establishes that decedent had no right or entitlement to the postmortem bonus and that the installment payments of this bonus were therefore not income in respect of a decedent. We do not accept petitioner's view. Whether decedent had a right or entitlement to a bonus award for 1969 is a question of law, and it is well established that this Court may disregard a stipulation*126 of law. Mead's Bakery, Inc. v. Commissioner, 364 F.2d 101, 106 (5th Cir. 1966), affg. on this point a Memorandum Opinion of this Court. This is particularly so when facts are presented, as they have been in this case, that conflict with the suggested interpretation of the stipulation. Mead's Bakery, Inc. v. Commissioner, supra at 106; Jasionowski v. Commissioner, 66 T.C. 312, 318 (1976).

Petitioner relies on several cases that have applied the "right-to-income" or "entitlement" test in determining whether post-death payments constitute income in respect of a decedent. Estate of Peterson v. Commissioner, supra; Halliday v. United States, 655 F.2d 68 (5th Cir. 1981); Claiborne v. United States, 648 F.2d 448 (6th Cir. 1981); Keck v. Commissioner, 415 F.2d 531 (6th Cir. 1969), revg. 49 T.C. 313 (1968); and Trust Co. of Georgia v. Ross,