The opinion of the court was delivered by: FORMAN
This is a suit wherein plaintiffs as executors of the estate of William J. Wells, deceased, seek to recover the sum of $ 52,320.71, plus statutory interest thereon, representing alleged overpayments assessed against and collected from plaintiffs on account of individual federal income taxes determined to be due from the decedent for the taxable period January 1, 1940 to March 22, 1940. All conditions precedent to the right to sue for recovery of the refund have been satisfied. The material facts are not in dispute and have been stipulated by the parties. Pursuant thereto they are found as follows:
1. The First National Bank and Trust Company of Montclair, New Jersey, a banking corporation, and Anna Wells Fitch, Plaintiffs herein, are the executors of the estate of William J. Wells, deceased, who died on March 22, 1940.
2. On February 1, 1939, the decedent entered into a written agreement agreement
with L. Bamberger & Co., a New Jersey corporation. This contract, among other things, provided that in consideration of the decedent remaining in the employ of the corporation for a period of ten years, commencing February 1, 1939, the decedent was to receive a salary of $ 12,500 per annum. In case of his death prior to the end of the ten-year period the corporation agreed to pay to the decedent's estate 'an amount equal to the excess, if any, of One Hundred and Five Thousand Dollars (105,000) over the aggregate of the amounts to be paid to you as salary since February 1, 1939.' This amount was payable to the decedent's estate 'either in a lump sum or in equal annual installments for the unexpired portion of the ten-year period.'
3. After the death of the decedent on March 22, 1940, plaintiffs, as executors of his estate, elected to receive a lump sum payment under the terms of the agreement, and pursuant thereto the sum of $ 91,458.33 was paid by the corporation to plaintiffs on August 1, 1940. Plaintiffs reported the amount so received in the federal estate tax return of the decedent.
4. On June 2, 1945, the Commissioner of Internal Revenue notified plaintiffs of a deficiency in the income tax liability of the decedent for the period from January 1, 1940 to March 22, 1940, the date of death, in the amount of $ 41,537.47, on the basis that under Sec. 42(a) of the Internal Revenue Code, 26 U.S.C. § 42(a), the lump sum payment of $ 91,458.33 should have been treated as taxable income accrued to the decedent and that it should have been included in the decedent's income tax return for the taxable period from January 1, 1940 to March 22, 1940.
5. The deficiency, plus interest thereon in the amount of $ 10,783.24, or a total of $ 52,320.71, was timely paid by the plaintiffs to the Collector. On August 24, 1945, plaintiffs filed a timely claim for refund with the Collector and on January 27, 1947, the claim was officially disallowed by the Commissioner of Internal Revenue.
The parties have agreed that in the event a final judgment is entered herein entitling plaintiffs to a judgment for the amount sought to be recovered in this action, the sum of $ 6,787.77, representing the amount of estate tax and interest refunded to plaintiffs, shall be considered as having been erroneously refunded and that the defendant would in this event be entitled to offset against such judgment the amount of the estate tax refund, plus statutory interest thereon.
The question presented is whether Sec. 42(a) of the Internal Revenue Act of 1938, the applicable statutory provision, required the inclusion in the gross income of the decedent for the taxable period ending with his death of the sum of $ 91,458.33, received during the year 1940 by the plaintiffs, as executors of the decedent's estate, under the terms of the employment contract entered into by the decedent prior to his death. Section 42(a) provided as follows: '(a) General rule. The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period. In the case of the death of a taxpayer there shall be included in computing net income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period.' (Italics added.)
Applying Sec. 42(a) to the facts of this case, we find that the resolution of the issue herein depends upon the construction of 'accrued' in the statute. Plaintiffs contend that since Sec. 42(a) authorizes the tax only upon amounts accrued up to the date of the taxpayer's death, the events which determine the right and the amount of payment did not, and could not, occur during the period in which fell the date of decedent's death. They maintain that neither the decedent nor the estate had any right to the payment as long as the decedent lived, and that the right of the estate to the payment in question was conditioned on the death of the decedent before February 1, 1949 and an election by the executors to take a lump sum rather than periodic payments. The defendant, on the other hand, takes the position that Sec 42(a) must be construed in the light of the legislative history surrounding its enactment, and that when viewed in this setting the words 'amounts accrued up to the date of his death' come to mean amounts which clearly reflect the taxpayer's entire income up to the date of his death. He submits that the proper interpretation of Sec. 42(a) is controlled by the decision of the Supreme Court in Helvering v. Enright, 312 U.S. 636, 61 S. Ct. 777, 85 L. Ed. 1093.
The last sentence of Sec. 42(a) was first enacted in Sec. 42 of the Revenue Act of 1934, c. 277, 48 Stat. 680, and the Congressional Committee reports recommending its addition indicate that it was intended to tax items of income earned during the life of the decedent which would otherwise escape all taxation because the 'courts have held that income accrued by a decedent on a cash basis prior to his death is not income to the estate, and under the present law, unless such income is taxable to the decedent, it escapes income tax altogether.'