1942 BTA LEXIS 862 | B.T.A. | 1942
Lead Opinion
The petitioner and his brother each invested $200,000 in contracts of annuity. The petitioner applied for and received contracts known as Exhibits 6 to 10 and his brother applied for and received contracts known as Exhibits 1 to 5. This was done by agreement. Each made his brother annuitant, with himself and his estate beneficiary or remainderman if he survived the brother. The cost of the annuity for life, the refund annuity (annuity payable after annuitant’s death) to petitioner, and to the brother dependent upon survival, is shown by the evidence;
In the taxable year the petitioner received from contracts 1 to 5 the sum of $14,980 and from contracts 6 to 10 the sum of $14,390.50. The question is to what extent such sums constitute taxable income.
The respondent, having asked for an increased deficiency, has the burden of proof in that respect. He argues, in effect, that, though each brother appears as applicant for the contracts which name his brother as annuitant and himself as beneficiary, if he survive, looking to substance it appears that in fact each brother purchased those contracts in which he is annuitant and his estate a contingent re-mainderman; that therefore the $200,000 paid by the petitioner is to be considered paid for the different privileges conferred by the contracts in the proportions which nominally those privileges cost the brother; that out of the $200,000 paid, petitioner in substance paid $170,141.64 for the annuity for himself, $3,685.08 for the right
To this theory the petitioner in effect replies that it is not shown that petitioner purchased in substance the contracts applied for and received by his brother, but that each paid for what he applied for and received; that petitioner invested $200,000 in the contracts and, therefore, there being no “transfer” but only annuities, the maximum tax should be 3 percent of $200,000 or $6,000; or, if the tax should be laid upon the cost of the contracts purchased by his brother, that there was no possibility of profit in three of the contracts purchased
The respondent, in the alternative, contends that if it be considered that there was no “transfer” within the language of section 22 (b) (2), then the tax should be laid upon 3 percent of the entire consideration, $400,000 paid by both brothers, on the theory that the Act of 1938, different in that respect from earlier law, does not limit the tax to consideration paid by the recipient of the annuity. Title Guarantee & Trust Co., Executor, 40 B. T. A. 475, is cited as authority.
Disposing first of the alternative, we do not find in the case last cited sufficient authority to bear out respondent’s view. It is true that there the 3 percent was computed upon consideration paid by another, but the present question was not considered. The question there posed was that of constitutionality. Therefore we do not think the answer to the present question would be well based upon that opinion. Though there is some indication in committee reports that the statute enacted in 1938 is not intended to limit the consideration to be considered in fixing the amount taxable, to that paid by the transferee, the conclusion to which we have come renders it unnecessary to consider the effect of the statutory expression in that regard.
After much consideration of this novel and interesting question, we have arrived at the conclusion that the petitioner must be considered as the purchaser of the contracts which his brother applied for and received, but that the whole $200,000 consideration can not be applied to the annuities purchased, only $173,826.62 (amount paid for annuity $170,141.64 plus $3,685.08 paid for right of annuitant’s estate to payments) being the basis for 3 percent taxed against annuities, and that the remainder, or $26,173.28 must be considered the consideration paid for a transfer, by petitioner’s brother, of the right to receive payment upon survival of the brother.
We find, in the difficulties and investigations as to taxes, the existence of creditors, and the provisions as to liability of the contracts to levy by creditors, reason for the “crossing” or reciprocity in the contracts. The contracts issued by the Mutual Life Insurance Co. provide partial escape from creditors in the prohibition of encumbrance, transfer, or anticipation by the annuitant. Those issued by the John Hancock Mutual Life Insurance Co. recite an agreement “in accordance with
Reviewed by the Board.
Decision will he entered wnder Bule 50.
SEC. 22. GROSS INCOME.
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(b) Exclusions Fbom Gboss Income.. — -The following items stall not be included in gross income and shall be exempt from taxation under this title:
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(2) Annuities, etc. — Amounts received (other than amounts paid by reason of the death of the insured and interest payments on such amounts and other than amounts received as annuities) under a life insurance or endowment contract, but if such amounts (when added to amounts received before the taxable year under such contract) exceed the aggregate premiums or consideraton paid (whether or not paid during the taxable year) then the excess shall be included in gross income. Amounts received as an annuity under an annuity or endowment contract shall be included in gross income; except that there shall be excluded from gross income the excess of the amount received in the taxable year over an amount equal to 3 per centum of the aggregate premiums or consideration paid for such annuity (whether or not paid during such year), until the aggregate amount excluded from gross income under this title or prior income tax laws in respect of such annuity equals the aggregate premiums or consideration paid for such annuity. In the case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance, endowment, or annuity contract, or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee shall be exempt from taxation under paragraph (1) or this paragraph.