Taxable Income from Bequest for Legal Services

Lesson 3 Case Brief Wolder v. Commissioner Case Information Name:Wolder v. Commissioner Court:U.S. Tax Court Citation:493 F.2d 608 Date:1974 Facts On October 3, 1947, Marguerite K. Boyce and Victor R. Wolder entered an agreement. Under the agreement, the latter would provide legal services to the latter for free for the rest of her life. In exchange, she would give away any securities that she might have if the company she was associated with, White Laboratories, were to undergo a merger or consolidation. Following the merger between White Laboratories and Schering Corporation on October 3, 1947, she received 750 shares of common shares and 500 preferred shares. She then gave away the latter 500 shares for $15,845. Over the years, she had also provided legal services to the other person for free. She also ensured that the agreement was upheld by giving away her shares to the latter. The IRS ruled that the shares and the $15,845 were taxable income (493 F.2d 608). The Court noted that the shares' fair market value was not a basis for exempting the donations from taxation. Issues Whether a bequest made in return for lifetime legal services constitute taxable income? Rule of Law A bequest made in exchange for lifetime legal services constitutes taxable income. Holding/Conclusion The bequests received by Wolder were not excluded from income under section § 102(a). Wolder and Boyce entered into the contract, which satisfied the obligations of a contract for services providing for a "postponed payment" in the form of a bequest. Rationale / Analysis of the Law Gross income must include all income from all sources derived. One exception is that property acquired by bequest does not constitute gross income. However, where a bequest is made in return for services rendered, that bequest should constitute taxable gain. UnderCommissioner v. Duberstein, 363 U.S. 278 (1960), the Supreme Court held that whether a transfer was a gift was determined by the transferor's primary reason for making the transfer. Similarly, to determine whether a transfer should be treated as a bequest, this Court must look to the decedent's intent in making the bequest. If the purpose of the bequest compensates for services rendered, the bequest constitutes taxable income. Here, the agreement between Wolder and Boyce contained mutual