## Facts

- Sydney J. Carter worked for Salomon Bros. & Hutzler for about 38 years and died on March 1, 1960.
- For 1960, Carter was employed under a yearly contract providing (1) a fixed annual salary of $15,000 and (2) an additional amount equal to 0.55% of the firm’s net profits only if he was still employed on September 30, 1960 (the end of the firm’s fiscal year).
- Carter had a long history of serious illness, with many hospitalizations and major operations during his employment; the firm’s partners were aware of his condition and had a personal relationship with the Carters.
- After Carter’s death, the firm’s administrative committee (general partners) decided, on an ad hoc basis, to pay Carter’s widow, Dorothy T. Carter, amounts equivalent to what Carter would have received had he lived through the end of the fiscal year.
- The payments to Mrs. Carter totaled $60,130.84, consisting of salary continuation checks and an amount tied to the firm’s profits.
- The firm had no formal or informal policy or plan to make payments to survivors of deceased employees, and it had no contractual or legal obligation to pay Carter beyond amounts earned before death.
- Dorothy Carter filed a joint federal income tax return for herself and Carter’s estate for 1960 and did not report the $60,130.84 as income, treating it as a non-taxable payment. (A separate distribution from the firm’s profit-sharing plan was reported as capital gain, with a statutory exclusion applied.)
- The Commissioner of Internal Revenue determined a deficiency, treating the $60,130.84 as taxable income (compensation) rather than an excludable gift.
- The Tax Court agreed with the Commissioner and sustained the deficiency.
- The estate and Mrs. Carter appealed to the United States Court of Appeals for the Second Circuit.

## Issues

1. Whether the employer’s voluntary post-death payments to the widow were taxable compensation includible in gross income under I.R.C. § 61(a) or a “gift” excludable under I.R.C. § 102(a).
2. Whether, on the record, the Tax Court clearly erred in finding the employer’s principal motive was compensatory rather than donative.

## Decision

- The Second Circuit reversed the Tax Court.
- The court held that the $60,130.84 paid by the employer to Mrs. Carter was a gift excludable from gross income under I.R.C. § 102(a), not compensation under § 61(a).
- The court concluded that the Tax Court’s determination that the payments were compensation was clearly erroneous in light of the record as a whole.

## Legal Principles

- Gross income includes compensation for services under I.R.C. § 61(a), while gifts are excluded from income under I.R.C. § 102(a).
- Whether a transfer is a “gift” for federal income tax purposes turns primarily on the transferor’s dominant reason for making the payment—i.e., whether it proceeded from detached and disinterested generosity rather than from a business or compensatory purpose.
- In the recurring context of employer payments to a deceased employee’s survivor, courts look to objective facts bearing on motive, including:
  - whether the employer had a contractual or legal duty to pay;
  - whether there was a company policy or plan for survivor benefits;
  - whether the payment was made to the widow personally rather than to the estate;
  - whether the widow performed services for the employer;
  - whether the employer received a measurable business return; and
  - whether the employee had already been fully paid for services rendered.
- Testimony by those who decided to make the payments about their intent is relevant evidence of motive and should not be brushed aside solely because it is provided after the fact.
- Appellate review of the Tax Court’s characterization of a payment as compensation versus gift is subject to the “clearly erroneous” standard for factfinding; reversal is warranted when the reviewing court is left with a definite and firm conviction that a mistake has been made.

## Conclusion

The Second Circuit held that Salomon Bros.’ voluntary payments to Dorothy Carter after her husband’s death were driven chiefly by donative intent, not by any obligation or business purpose, and therefore were excludable gifts under I.R.C. § 102(a); it reversed the Tax Court’s contrary finding as clearly erroneous.


Estate of Sydney Carter v. Commissioner, 453 F.2d 61 (1971)