## Facts

- Edward A. Tully, Sr. was employed by Tully and DiNapoli, Inc. (T & D), a closely held corporation.
- Tully owned 50% of T & D; Vincent P. DiNapoli owned the remaining 50%.
- On July 1, 1959, Tully, DiNapoli, and T & D executed a written agreement providing that, upon the death of either shareholder-employee, the corporation would pay a death benefit to the deceased shareholder’s widow.
- The agreement set the death benefit at an amount equal to twice the annual salary the corporation paid the decedent for the year immediately preceding death.
- In October 1963, the parties amended the agreement to cap the maximum death benefit payable at $104,000.
- Tully died on March 7, 1964.
- Pursuant to the amended agreement, T & D paid $104,000 directly to Tully’s widow.
- The co-executors filed a federal estate tax return that did not include the $104,000 death benefit in Tully’s gross estate.
- The IRS determined the payment was includable in the gross estate, issued a deficiency, and the estate paid the asserted tax and sought a refund.
- The estate brought a refund suit in the United States Court of Claims; the parties filed cross-motions for partial summary judgment on the includability of the death benefit (with other estate-tax issues reserved for later proceedings).

## Issues

1. Whether the $104,000 paid by T & D directly to the decedent’s widow was includable in the decedent’s gross estate under I.R.C. § 2038(a)(1) as property subject at death to the decedent’s power to “alter, amend, revoke, or terminate” enjoyment.
2. If not includable under § 2038(a)(1), whether the $104,000 was includable under I.R.C. § 2033 as property in which the decedent had an interest at the time of his death.

## Decision

- The Court of Claims granted the estate’s motion for partial summary judgment and denied the government’s cross-motion.
- The court held the $104,000 death benefit was not includable in the gross estate under § 2038(a)(1) because the arrangement did not involve a transfer by the decedent of a property interest coupled with a qualifying power retained by him at death.
- The court held the $104,000 was not includable under § 2033 because the decedent did not own, and his estate did not succeed to, any enforceable right to receive the death benefit; the corporation’s contractual obligation ran directly to the widow.

## Legal Principles

- I.R.C. § 2038(a)(1) applies only when the decedent made a transfer of an interest in property and, at death, held a power (alone or with others) to alter, amend, revoke, or terminate the transferee’s enjoyment of that transferred interest.
- A corporation’s contractual promise to pay a death benefit to a shareholder-employee’s widow is not, by itself, a transfer by the shareholder of his own property for purposes of § 2038(a)(1).
- A shareholder’s ability to influence corporate action is not automatically treated as the shareholder’s retained § 2038 power; when the shareholder lacks unilateral control (here, a 50/50 ownership split), corporate governance does not amount to a personal power to change the widow’s contractual rights within § 2038(a)(1).
- I.R.C. § 2033 includes in the gross estate property interests owned by the decedent at death; it does not include amounts payable to a third party when the decedent never possessed a right to receive the payment.
- When a decedent’s only relationship to the benefit is stock ownership in the obligor corporation, the includable asset is the stock’s value; the corporation’s contractual liabilities affect that valuation rather than creating a separate includable right to the death benefit proceeds.

## Conclusion

The Court of Claims held that a $104,000 death benefit paid by a closely held corporation directly to the widow of its 50% shareholder-employee was not part of the decedent’s gross estate because the decedent did not transfer a property interest subject to a retained § 2038(a)(1) power and had no property interest in, or enforceable right to, the death benefit at death under § 2033.


Estate of Tully v. United States, 528 F.2d 1401 (1976)