Estate of Putnam v. Commissioner
Headline: Dividend tax timing for decedents: Court ruled that dividends declared before death but payable to shareholders of record later do not accrue at declaration, making them taxable to the estate or later owner.
Holding: Under federal tax law Section 42, a dividend declared before a shareholder’s death but payable to record holders on a later date does not accrue to the decedent at declaration.
- Clarifies when dividends count as decedent income for tax purposes.
- Makes estates rather than deceased taxpayers responsible when record date follows death.
- Replaces varying state rules with a uniform federal test for accrual.
Summary
Background
Henry W. Putnam died on March 30, 1938. Several corporations had declared dividends before his death that were payable to stockholders of record on dates after he died. Those dividends totaled $24,051.75. The Commissioner of Internal Revenue treated those declared amounts as income of the deceased under the federal tax law Section 42. A lower tax board looked to different state rules to decide when a dividend vests, while a federal court thought federal law should decide and held the dividend accrued at declaration.
Reasoning
The Court said the meaning of “accrued” under Section 42 must be uniform under federal law, not vary by state law. The Justices explained that for an item to “accrue” as the decedent’s income there must be a right to receive it and the recipient must be identifiable. A declaration that names a later record date does not fix who will receive the dividend and does not create a present right to payment. Because the distributee was not determined when the corporations declared the dividends, those amounts did not accrue to Putnam at declaration.
Real world impact
The Court reversed the lower ruling and held these declared-but-payable-later dividends do not count as the deceased’s income on the declaration date. Instead, such amounts will be taxed when actually attributable to an identifiable recipient — for example, the estate or the later stockholder on the record date. The decision creates a single federal rule for these accrual questions rather than relying on different state rules.
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