Estate tax valuation of deferred compensation rights in Goodman v. Granger

Goodman v. Granger Case

Goodman v Granger Case was the case that revealed the problem of estate valuation for the tax purposes. The case reveals the examination of instances where the value of the property of the deceased is different from the value of the property during his life and the examination of the case are to ascertain whether the value of the property increased or decreased. The court of Appeal reversed the rule of the District Court on the ground that the contract right should be given its full value for the purpose of estate tax purpose.

The purpose of this paper is to explore the principal issues of the U.S. Court of Appeal based on the Goodman v. Granger case.

Principal Issues of the U.S. Court of Appeal

The principal issue in the case is to ascertain when the federal government estate tax attaches. "More specifically stated, when does such tax attach to a decedent-employee's contractual right to annual deferred compensation payments from his employer, payable to his estate after his death?" (United States Court of Appeal, 1957 p 1). The government presented this problem to the Court of Appeal in order to reverse the ruling of the District Court that favored the taxpayer. Thus, "determination of the time when that interest is to be valued is the crux of the dispute." (United States Court of Appeal, 1957 p 1).

The principal issues of U.S. Court of Appeal on Goodman v. Granger are as follows:

Principle of estate tax

Answer to the question on when the estate tax is attached after owner's death,

Imposition of estate tax should be transferred to the property after the owner's death.

Theory of contract that has marketable value needs to be assessed and determined for the estate tax purpose.

The issues of the U.S. Court of Appeal on the case of Goodman v. Granger provide a revelation of when the estate tax is attached. The Court of Appeal reversed the ruling of the District Court on the ground that the federal estate tax was to be imposed on transfer of property and not to be imposed on the property itself. The correctness of the instant case prevents the avenues for people to avoid the estate tax.

The instance case between Goodman v. Granger is based on the problem of taxation on the estate following the death of the owner. The decedent's widow received a monthly payment from former employer of her husband under a deferred compensation agreement. However, the court stated that the rights to the payments should be valued when the property rights vested in the widow were absolute. (Brandon, 1961). The decedent was entitled to receive $6,000 per annum for 15 years based on the contract of employment. However, the payment must start after the termination of employment for any reason. Thus, the decedent death eliminated the right to pay tax for the estate. However, the Commissioner determined that cumulative estate tax was valued to $90,000 and to be payable under the fixed agreement. The petitioner, who was seeking for a tax refund "successfully contend in the District Court that the contract right should be valued before death. Under this theory, it was found to have no market values" (Columbia Law Review, 1958 p 124). The District Court contention revealed that decedent's contractual right ought to be valued before the death and at such moment, the contractual right was deemed valueless.

However, the U.S. Court of Appeal reversed the case on the ground that "valuation for estate tax purpose is determined with reference to the fact of decedent's death. It is therefore based on the value of decedent's property at the moment subsequent to his demise" (Columbia Law Review, 1958 p 124). Essentially, the imposition of estate tax is generally based on the value of the property controlled or owned by a decedent and estate may be valued 6 months after decedent's death. Under estate taxation, government is deemed to tax decedent's net worth. Thus, the Court of Appeal revealed the deficiency in the assessment of the value of property because the conclusion of the stake of contract created should follow the theory of contract since the estate was deemed to have a marketable value, which should be assessed and determined. Moreover, the Court of Appeal clarified that the federal estate tax should be imposed upon transfer of the property based on the Internal Revenue Code (IRC) of 1939, sec 810. Under the code, the decedent's gross estate should be determined and include the value of the property at the time of death. Moreover, Treasury Regulation 105 under section 81.10 also reveals that the fair market value of an estate should be used to determine the measure of estate value.

Thus, the Court of Appeal showed that estate tax should be measured based on the value of the property transferred by death. Moreover, the government had the right to value deferred compensation payment similar to annuity in accordance to the Treasury Regulations.

Conclusion

The ruling of the Court of Appeal on the case of Goodman v. Granger clarifies the issues of when the federal government estate tax attach. The question was raised by the government at the Court of Appeal in challenging the ruling of the District Court that favored the taxpayer. The ruling of the Court of Appeal clarifies that the estate is subject to taxation even if the estate is transfer to another person after the owner's death.

Reference

Columbia Law Review, (1958). Taxable Value of Estate Determined at Instant after Death, Columbia Law Review. 58 (1): 124-126.

Brandon, M.M. (1961). Estate Tax - Buy-Sell Agreements, Louisiana Law Review, 21(4): 827-630.

Meresidis, A. (2002). The I.R.C. § 2053(a)(3) Controversy: Should Events After Death Affect the Value of Estate Tax Deductions for Claims Against the Estate? Fordham Law Review, 70(6).

United States Court of Appeal (1957). Goodman v. Granger 243 F.2D 264 (3D CIR. 1957), United States Court of Appeal Third Circuit.