## Facts

- Martha King Disborough owned 600 of 1,600 shares of King’s Indiana Billiard Co., Inc.; her son owned 600 and her daughter-in-law owned 400.
- In 1948, the corporation redeemed Disborough’s 600 shares under a written contract for $150,000: $6,000 at execution and $1,000 monthly for 144 months (no interest unless delinquent).
- The contract provided that if Disborough died before all installments were paid, the entire unpaid balance—except the two installments maturing next after death—would be canceled and discharged and would no longer be an obligation of the corporation.
- Disborough died before completion of the installment term; the Commissioner computed $44,135 as the unpaid “balance due” at death ignoring the death-cancellation clause.
- The Commissioner determined an estate tax deficiency of $2,391.58 by including the $44,135 in the gross estate.
- Ruby Louise Cain, as transferee of estate assets, challenged the inclusion and conceded transferee liability only if the estate tax deficiency was valid.

## Issues

1. Whether the contractually canceled unpaid balance of the redemption note ($44,135) constituted a property interest includible in the decedent’s gross estate at death.
2. Whether the installment arrangement triggered inclusion under I.R.C. § 2036(a)(1) as a transfer with a retained life interest in the payments.
3. Whether, if the balance was not includible, any transferee liability could be imposed on the petitioner.

## Decision

- The court held that the $44,135 canceled by the contract at death was not includible in the gross estate.
- Only the two installments that remained payable after death under the contract could be included.
- The Commissioner’s § 2036(a)(1) theory was rejected because the decedent had no enforceable right at death to the canceled installments.
- Because the asserted deficiency depended on including the canceled balance, the petitioner had no transferee liability for that deficiency.

## Legal Principles

- Federal estate tax reaches only property interests and enforceable rights that exist at the decedent’s death and pass to the estate or successors.
- A contractual right to installment payments that terminates by its own terms at death (except for specified surviving payments) does not create an includible right to the canceled balance.
- I.R.C. § 2036(a)(1) does not permit inclusion of amounts the decedent did not have a legally enforceable right to receive at death; the statute cannot revive an extinguished contractual obligation.
- Transferee liability is derivative; absent an estate-level tax liability, there is no transferee liability for the asserted deficiency.

## Conclusion

The court ruled that the estate could not be taxed on installment payments that the corporation was contractually released from paying upon the seller’s death, so the canceled balance was excluded from the gross estate and the asserted transferee liability failed.


Cain v. Commissioner, 37 T.C. 185 (1961)