Estate of Cartwright v. Commissioner

Robert Cartwright was a shareholder at law firm Cartwright, Slobodin, Bokelman, Borowsky, Wartnick, Moore & Harris, Inc. (CSB). CSB compensated its attorneys, including Cartwright, with an annual salary and annual bonuses that were based on profits. CSB had a shareholder’s agreement that provided for payments to a deceased shareholder’s successors for the deceased shareholder’s stocks and various earnings and profits. In 1988, CSB amended the shareholder’s agreement as to how it applied upon Cartwright’s death, specifying that the firm would purchase life-insurance policies with a value of $5,000,000, which would be used to pay Cartwright’s estate (plaintiff) for his outstanding stocks and his claims “to any cases or work in process that may otherwise be made on behalf of Robert E. Cartwright.” Cartwright died on June 30, 1988, and CSB paid a total of $5,062,029 to Cartwright’s estate (plaintiff). The estate filed an income tax return for the estate but omitted the entire amount received from CSB. CSB had reported $4,080,256 to the Internal Revenue Service (IRS) (defendant) as compensation, and the IRS found the estate to be deficient on taxes based on that amount. Cartwright’s estate appealed to the United States Tax Court and argued that the entire amount received from CSB was a payment made to redeem Cartwright’s stocks. Based on the amendment to the shareholder’s agreement, which contemplated payment for both stocks and Cartwright’s claims to firm income, the tax court held that the portion of the payment made for Cartwright’s claims to income was income in respect of a decedent and must be taxed to the estate as such. The tax court calculated the amount of the payment that was taxable based on various factual matters. Cartwright’s estate appealed.