Estate of Carter v. Commissioner
453 F.2d 61 (1971)
Sometimes, when an employee
dies, a company will give a monetary gift to a widow.
Technically, since the widow
wouldn't have received the gift 'but for' her husband's work, it should
be not be considered a gift.
Gifts are covered by 26 U.S.C. §102.
See Commissioner v.
Duberstein (363 U.S. 278 (1960)).
However, courts are
sympathetic to widows and tend to consider the income to be a gift.
Only the Second Circuit had
consistently found the money to not be a gift.
Carter (who lived in the
Second Circuit) died, and his company made a large payment to his widow.
They even mentioned that
they were making the payment for Carter's service.
The IRS claimed that the money
was not a gift, but was instead
payment for services made by Carter. Therefore it was taxable as gross
The Tax Court found for the
The Tax Court (despite they
were a national court), found that they would apply the precedent of the
district the taxpayer was located in. Therefore, they found that the
money was not a gift.
The Appellate Court reversed.
The Appellate Court noted
that if Carter's widow had lived outside the Second Circuit, the money
would be considered to be a gift,
and not taxable.
The Court found that it was
unfair to tax those in the Second Circuit when they wouldn't be taxed
anywhere, so they reversed precedent and found that money paid by
companies to employee's widows is a gift, and not taxable.