Opinion
Docket No. 37696.
1953-08-26
ESTATE OF ALBERT B. KING, DECEASED, EDITH F. KING, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Floyd F. Toomey, Esq., and John P. Lipscomb, Jr., Esq., for the petitioner. E. M. Woolf, Esq., for the respondent.
Decedent's employer, under the terms of its established bonus plan, awarded him substantial bonuses in 1946, 1947, and 1948. Part of the 1948 award was required to be invested in capital stock of the employer. One-fourth of each award was paid immediately, the balance to be delivered in three equal annual installments. The plan vested the rights of a stockholder in decedent but provided for forfeiture of the undelivered portions of the awards in the event he left the service of the company. At the time of decedent's death, portions of each award remained undelivered and were paid by the employer to decedent's executrix as provided by the plan. Held, the undelivered portions of the bonus awards were includible in decedent's gross estate, under section 811(a) of the Internal Revenue Code, as property in which decedent had an interest at the time of his death. Floyd F. Toomey, Esq., and John P. Lipscomb, Jr., Esq., for the petitioner. E. M. Woolf, Esq., for the respondent.
This proceeding is brought to test the correctness of respondent's action in determining a deficiency of $1,930.70 in the estate tax of the decedent. The sole issue herein is whether the amount of $37,483.25 payable to decedent's estate under the bonus plan of E. I. du Pont de Nemours & Company, Inc., is includible in the gross estate of decedent. The facts on which decision is sought were stipulated by the parties.
FINDINGS OF FACT.
At all times material herein and until his death on September 9, 1948, Albert B. King (hereinafter referred to as the decedent) was a citizen of the United States and a resident of Wilmington, Delaware.
Under his will dated March 12, 1921, decedent left his entire estate to his wife, Edith F. King. Under the laws of the State of Delaware, however, two after-born children were each entitled to take one-third of two-thirds of decedent's personal property. Petitioner is the duly appointed and qualified executrix of the decedent's estate and resides in Wilmington, Delaware. The estate tax return involved herein was filed with the collector of internal revenue for the district of Delaware at Wilmington, Delaware. The petitioner did not elect to have the value of the gross estate of the decedent valued as of a date subsequent to the time of decedent's death.
For some years prior to his death and at the time of his death, decedent was an employee of E. I. du Pont de Nemours & Company, Inc., a corporation (hereinafter referred to as the Company). At all times material herein, the Company maintained a bonus plan under which and subject to the conditions of which awards might be made to employees of the Company who had made unusual contributions to its success. The awards were of two types: Class A and Class B. Only the latter type of award is involved in this proceeding. Class B awards might, in the language of the bonus plan
be granted to those who have contributed most in a general way to the Company's success by their ability, efficiency and loyalty, including those who have proven themselves qualified to occupy important managerial posts and to succeed to higher positions.
In the discretion of the bonus and salary committee, under article III of the bonus plan, awards could be made ‘in common stock acquired by the Company, or in cash to be invested in new common stock issued directly to the beneficiaries, or in the form of cash,‘ or in any combination thereof.
Article VII of the bonus plan provided that:
In the case of a cash award to be invested in stock of the Company the Bonus Custodian shall advise the beneficiary that such award is conditioned upon its investment in common stock of this Company and shall procure from the beneficiary a signed subscription for the number of shares available to him at the price fixed therefor; such subscription agreement to provide that the stock is to be issued in the name of the beneficiary and is to be subject to the provisions of the Company's Bonus Plan.
Payment for newly issued stock was to be made ‘by the beneficiaries through the Bonus Custodian from cash bonuses.‘
Any award in cash to be invested in common stock was subject to the following restrictions imposed under article VIII of the bonus plan:
The Bonus Custodian shall procure from each beneficiary an irrevocable power of attorney with respect to any shares not immediately deliverable to the beneficiary hereunder, which power shall provide that
(a) The beneficiary will not sell, assign or pledge any of such stock remaining in the custody of the Bonus Custodian;
(b) The Bonus Custodian shall receive and hold any stock dividend declared on the stock in his custody, same to be released to the beneficiary as and when the stock in the custody of the Bonus Custodian is released; and
(c) In case the beneficiary leaves the service of the Company, or is dismissed, stock in the custody of the Bonus Custodian may be sold and settlement made as hereinafter provided in Article XI.
Under the bonus plan, the beneficiary of an award of stock or cash to be invested in stock was given the following rights with respect thereto:
An award in stock of the Company, or the investment of a cash award in stock of the Company, shall vest in the beneficiary all the rights of a stockholder in such stock, subject (1) to the right of the Bonus Custodian to possession of certificates evidencing a portion of the stock as herein provided, and (2) to the right of the Company to have stock in the custody of the Bonus Custodian sold and the proceeds transferred to the Company in the case of Class ‘A‘ awards, and to the Class ‘B‘ Bonus Fund in the case of Class ‘B‘ awards, as provided in Article XI hereof, in case the beneficiary leaves the service of the Company.
The bonus plan contained the following provisions material herein with respect to delivery or payment of any award:
3. Except as provided in paragraph 1 and 2 of this Article, when any bonus in the form of stock or in the form of cash to be invested in stock has been awarded, a certificate for one-fourth of the shares representing such award or investment, free from all restrictions, shall be delivered to the beneficiary immediately, and certificates for the balance shall be delivered to the Bonus Custodian who hold the same for release to the beneficiary as follows:
1/4 of the total number of shares shall be released after the end of the year in which the award is made;
1/4 of the total number of shares shall be released after one year from the end of the year in which the award is made;
1/4 of the total number of shares shall be released after two years from the end of the year in which the award is made;
provided, however, that should such beneficiary leave the service of the Company, settlement will be made as hereinafter provided.
4. No fractional share will be delivered or released hereunder.
5. Except as provided in paragraphs 1 and 2 of this Article, when any bonus in the form of cash not to be invested in stock has been awarded, one-fourth of such award shall be paid to the beneficiary immediately, and the balance of such award shall be paid to the beneficiary in three equal annual installments, the first installment to be payable after the end of the year in which the award is made; provided, however, that should such beneficiary leave the service of the Company, settlement will be made as hereinafter provided.
Any beneficiary of an award payable in installments was subject to the following provisions of the bonus plan relating to forfeiture:
1. The Bonus Custodian shall open an account with each beneficiary to whom a bonus is to be delivered in accordance with Article X, paragraph 3 or 5, charging him with the total number of shares or cash in his award or investment, crediting him immediately with one-quarter thereof, and crediting him, with respect to the remaining three-quarters, at the rate of 1/48th of such total number of shares or cash, as the case may be, for each month of service beginning with January of the year in which the award was made.
2. If a beneficiary leaves the service of the Company, or is dismissed from such service, such number of whole shares as are represented at the time in the debit balance of his account, plus any whole share in which the beneficiary has a fractional interest, may be sold at the market value, and the proceeds, after deduction of any portion attributable to the beneficiary's fractional interest, credited to the appropriate Company account (in the case of a Class ‘A‘ award), or to the Company's Class ‘B‘ Bonus Fund (in the case of a Class ‘B‘ award), and in such case a certificate for the remaining whole shares of stock, together with whatever portion of the proceeds from the sale of stock, as authorized above, is attributable to the beneficiary's fractional interest, shall be delivered to the beneficiary free from all restrictions; and in the case of a cash award not to be invested in stock, an amount equal to the debit balance of his account shall be credited to the appropriate Company account (in the case of a Class ‘A‘ award), or to the Company's Class ‘B‘ Bonus Fund (in the case of a Class ‘B‘ award), and the amount, if any, representing the unpaid credits in his account shall be paid to the beneficiary immediately; or he may continue a beneficiary under the Bonus Plan to such extent as the Executive Committee, or the Bonus and Salary Committee if the beneficiary is a Director of the Company, may determine.
3. Beneficiaries retired on a pension shall not forfeit thereby any rights with respect to bonuses awarded.
The bonus plan contained the following provision relating to the death of a beneficiary:
Upon the death of a beneficiary the Bonus Custodian shall release the certificates in his custody evidencing the undelivered shares of his award or investment, and in the case of a cash award not to be invested in stock the Company shall release the undelivered portion thereof, free from all restrictions, to the executor or administrator of his estate upon legal proof of his appointment.
Pursuant to the bonus plan, Class B awards were made to decedent in cash on February 18, 1946, in the amount of $11,500 and on February 17, 1947, in the amount of $22,000. On February 16, 1948, a Class B award of $32,000 in cash was made to decedent, of which $11,600 thereof was required to be invested in new common stock of the Company at a price of $180 per share or a total of 62 shares.
Payments to decedent with respect to these awards were made on the dates and in the amounts as follows:
+-------------------------------------------------------+ ¦ ¦Mar. 5, 1946 ¦Jan. 2, 1947 ¦Jan. 2, 1948 ¦ +----------+--------------+--------------+--------------¦ ¦1946 Award¦$2,875 ¦$2,875 ¦$2,875 ¦ +-------------------------------------------------------+
Mar. 7, 1947 Jan. 2, 1948 1947 Award $5,500 $5,500
Mar. 5, 1948 1948 Award $5,210 15 shares
On the date of decedent's death, the difference between the amounts awarded to decedent under the bonus plan and the amounts previously paid to him consisted of cash and stock of the total value of $37,483.25. as follows:
+--------------------------------------+ ¦1946 Award ¦$2,875.00 ¦ +---------------------------+----------¦ ¦1947 Award ¦11,000.00 ¦ +---------------------------+----------¦ ¦1948 Award ¦ ¦ +---------------------------+----------¦ ¦(a) Cash ¦15,630.00 ¦ +---------------------------+----------¦ ¦(b) 47 shs. of common stock¦7,978.25 ¦ +---------------------------+----------¦ ¦ ¦$37,483.25¦ +--------------------------------------+
Of the $37,483.25 in cash and stock, $10,895.63 thereof in value had been credited to decedent's account at the time of his death in accordance with the provisions of article XI(1) of the bonus plan and was not subject to forfeiture as provided in article XI thereof. On September 29, 1948, the entire undelivered amounts of cash and stock of the then total value of $37,483.25 were paid and delivered to decedent's estate in accordance with the provisions of article XII of the bonus plan.
For some time prior to the decedent's death and thereafter, it was the usual practice of the Company, where an employee to whom an award had been made left the service of the Company or was dismissed from such service prior to the time payment of the award had been completed in the manner provided in article X, to require the forfeiture of the remaining unpaid portion of such award, which had not been credited to such employee as provided in article XI.
Article XV of the bonus plan provided that the directors of the Company reserved the right to modify the plan from time to time or to repeal the plan entirely or to discontinue the awarding of bonuses. It further provided, however, that no modification of the plan should operate to annul a bonus award already granted without the consent of the beneficiary.
OPINION.
ARUNDELL, Judge:
The issue herein concerns the includibility in decedent's gross estate of the sum of $37,483.25 paid to his executrix under the terms of the bonus plan of decedent's employer. The respondent has determined that the payment is subject to the estate tax under section 811(a) or 811(f) of the Internal Revenue Code, or both, and that a deficiency of $1,930.70 exists in the estate tax.
Section 811(a) provides ‘The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property * * * To the extent of the interest therein of the decedent at the time of his death.‘ Under the provisions of an established bonus plan, decedent's employer awarded substantial sums to him in 1946, 1947, and 1948. Part of the 1948 cash award was required to be invested in capital stock of the corporate employer. The bonus plan provided that each beneficiary was to be notified by a bonus custodian appointed by officials of the Company of his bonus award, subject to the provisions of the plan. The bonus custodian then opened an account for each beneficiary, charging him with the total number of shares or cash in his award. One-fourth of the award was immediately deliverable to the beneficiary, the balance to be paid to him in three equal annual installments. At the time of decedent's death, portions of each of the three awards in question remained undelivered.
After careful study of the bonus plan, we are convinced that at the time of his death decedent had a property interest in the undelivered cash and stock sufficient to require their inclusion in his gross estate. The plan provided that awards might be made in cash or in stock reacquired by the Company or in cash to be invested in new common stock issued directly to the beneficiary. It was specifically provided that the recipient of an award of cash to be invested in stock should sign a subscription for the stock and that the shares should be issued in the name of the beneficiary. Payment for the shares was to be made by the beneficiary through the bonus custodian from cash bonuses. All the rights of a stockholder were expressly vested in the beneficiary by the plan. The record does not disclose the extent of the rights of a stockholder of the Company in question but among the principal rights of stockholders in ordinary business corporations are the rights to attend and vote the corporate meetings, to elect directors, and to participate in dividends. 18 C.J.S. 1156. We think it manifest that a corporation is without authority to vest such rights in anyone other than an owner of corporate stock. In light of these factors, we think it clear that the beneficiary became the owner of the shares of stock, subject to the right of the bonus custodian to retain possession of a portion of them.
It is petitioner's contention that decedent had no interest in the undelivered cash and stock at the time of his death within the meaning of section 811(a). In support of that contention, petitioner submits that the Company was free to abandon the plan at any time and to impose any restrictions it chose upon the the awards made. While it is clear that the Company could cease making awards at any time or impose additional restrictions applicable to future awards, the plan expressly provided that no modification should operate to annual bonus awards already granted without the consent of the beneficiary.
Petitioner relies on the restriction in the plan against the sale, assignment, or pledge by the beneficiary of undelivered shares of stock awarded to him but held by the bonus custodian. The importance in this restriction, however, lies in the fact that the plan required the bonus custodian to procure from the beneficiary ‘an irrevocable power of attorney‘ which provided that the beneficiary would not sell, assign, or pledge stock in the custody of the bonus custodian. It also empowered the bonus custodian to receive and hold any stock dividend declared on the stock in his custody until release of the stock to the beneficiary and to sell the stock and made settlement as provided in the plan upon the beneficiary's leaving the service of the Company. For the Company to require a document of that nature from the beneficiary seems to us to be wholly inconsistent with the theory that the beneficiary has no interest in the property.
The plan further provided that in the event of a beneficiary's leaving the service of the Company those portions of awards remaining in the debit account of the beneficiary might be transferred to the appropriate Company account in the discretion of the officials of the Company, and it has been stipulated that it was the usual practice of the Company to require forfeiture in such cases. Petitioner asserts that by reason of this provision of the plan, decedent did not become the owner of an installment until he had actually received it. This argument is equivalent to a contention that continued employment was a condition precedent to ownership of each installment. We think it clear, however, that the provision in question, significantly entitled ‘Forfeiture by Beneficiary,‘ created rather a condition subsequent to the award, by the operation of which awards previously granted might be forfeited. A vested property interest is no less the property of its owner by reason of a mere possibility that his interest may be divested.
At the end of each month that a beneficiary continued in the service of the Company, the bonus custodian transferred a proportionate amount of the unpaid balance of each award from a debit to a credit in the account of the beneficiary, after which the amount so credited was no longer subject to forfeiture. At the time of decedent's death, cash and stock of the value of $10,895.63 had been so credited to decedent and would have been payable even if he had left the service of the Company. The balance of the undelivered $37,483.25, however, was also the property of the decedent at the time of his death, since the condition subsequent had not operated so as to divest the interest of decedent, who was still in the employ of the Company. It follows, therefore, that the respondent was correct in including the entire amount of $37,483.25 in decedent's gross estate as property in which he had an interest at the time of his death under section 811(a).
The numerous cases cited by petitioner, while interesting and instructive, differ materially from the particular factual situation herein presented and are not controlling as regards the question before us. Having found that the entire amount in question is includible under section 811(a), we deem it unnecessary to consider the applicability of section 811(f) of the Internal Revenue Code.
Decision will be entered under Rule 50.