Hall v. Commissioner , 17 B.T.A. 752 ( 1929 )

ARTHUR F. HALL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Hall v. Commissioner

Docket Nos. 17714, 21423.

United States Board of Tax Appeals

17 B.T.A. 752; 1929 BTA LEXIS 2258;

September 30, 1929, Promulgated

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Assignment of payments to be made under a contract with an insurance company providing for payment of renewal premiums, constitutes assignment of future income and is taxable to the assignor in the year payments are made by the insurance company.

Henry Ravenel, Esq., Geo. B. Buist, Esq., and J. A. Selby, Esq., for the petitioner.

A. H. Fast, Esq., and H. D. Thomas, Esq., for the respondent.

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SIEFKIN

These are proceedings, duly consolidated for hearing and decision, for the redetermination of deficiencies in income taxes for the following years and amounts:

Docket No.	Year	Proposed deficiency
17714	1921	$7,921.79
21423	1922	10,634.90
1923	8,152.31
1924	5,251.77

The only question is whether certain amounts paid to the petitioner's wife in the years in question by the Lincoln National Life Insurance Co. are taxable income of the petitioner.

FINDINGS OF FACT.

The petitioner is a resident of Fort Wayne, Ind. He was secretary and manager of the National Life Insurance Co. from the time it started business in 1905. Between 1920 and 1922 he was first vice president and in 1923 and 1924 he was president of the company.

On September 23, 1905, he entered into a contract with the company by which he agreed to devote his entire time to the development of its business and the company agreed to pay him an annual salary of $2,600 and pay to him, his heirs, administrators, executors and assigns "commissions on all renewal premiums paid to first party [the company]" during the life of the contract at a variable percentage rate. The life of the contract was 15 years and was conditioned on the company having a minimum amount of insurance on its books each year of the contract. The contract also contained a provision that if the petitioner voluntarily left the employ of the company he would forfeit his right to commissions on renewal premiums after 7 years from the time he left. The contract provided further:

that second party's [the petitioner] commission interest in renewal premiums as set out in this contract shall not attach until said renewal premiums are paid in to first party.

The petitioner remained in the employ of the company and the contract was in force during its life.

The petitioner was married to Mrs. Ann O'Rourke Hall on October 14, 1920. He had been married before and had three children. One of such children did not want him to marry, and to insure an amicable settlement of his property in case of his death, the petitioner and his wife entered into an oral antenuptial contract which was perpetuated in writing under date of January 2, 1921. The substance of the agreement was that Mrs. Hall, in consideration of the benefits conferred upon her, agreed to accept such benefit in lieu of any inchoate rights in petitioner's property to which she might be entitled and agreed to accept as her share of the estate the same proportion that she would receive if his estate were divided equally, share and share alike, between her and each surviving child. The petitioner agreed to convey residence to himself and his wife as tenants by the entireties, and to sell, assign and transfer to his wife an undivided interest in the contract of July 1, 1905, whih the insurance company to the extent of $33,333.33 per year for three years. Mrs. Hall agreed to pay certain then existing debts of the petitioner to the extent of $57,000 and a limited amount which he might thereafter incur, the total of both not to exceed $90,000.

Under date of January 2, 1921, the petitioner executed an assignment as follows:

In consideration of the mutual promises contained in a certain agreement by and between Arthur F. Hall, as first party, and Ann O'Rourke Hall, as second party, dated January 2d, 1921, and subject to and in accordance with the terms and conditions of said agreement, I hereby sell, assign, transfer and deliver to Ann O'Rourke Hall an undivided interest in and to a certain contract entered into by The Lincoln National Life Insurance Company, of Fort Wayne, Indiana, with Arthur F. Hall (which contract bears date of July 1st, 1905) to the extent of thirty-three thousand three hundred thirty-three dollars and thirty-three cents ($33,333.33) per annum to be paid to said Ann O'Rourke Hall for a space of three years from the date thereof, subject to and in accordance with the terms of said contract with The Lincoln National Life Insurance Company.

Dated this second day of January, nineteen twenty-one.

(Signed) ARTHUR F. HALL.

The Lincoln National Life Insurance Co. was given a copy of the assignment, accepted it, and thereafter made payments to Mrs. Hall pursuant thereto.

Under date of December 28, 1923, the petitioner and his wife entered into a supplemental agreement by which he agreed to make a further assignment of his interest in the contract with the insuranc company to the extent of $42,178.27, to be paid to her one-half in 1924 and one-half in 1925. On the same day he executed an assignment similar to the assignment of January 2, 1921, which was communicated to the insurance company, which made payments to Mrs. Hall on account thereof.

Payments actually made to Mrs. Hall by the insurance company pursuant to the assignments were as follows:

1921	$31,588.55
1922	35,078.02
1923	33,333.24
1924	21,089.16

Mrs. Hall did not return to the petitioner any of the money so paid.

All of the services required of the petitioner under the contract of July 1, 1905, for which payment was to be made under the contract and pursuant to which, under the assignments, the company paid Mrs. Hall, were performed by the petitioner prior to 1921.

In computing the deficiencies involved in this proceeding, the respondent added to the petitioner's income the sums paid by the insurance company to Mrs. Hall.

OPINION.

SIFFKIN: ^{*2263 succeed only if he has shown that prior to the year 1921 he assigned a property right that had matured. He can not succeed in this proceeding if the subject matter of his assignment has not come into being. We believe the agreement of the petitioner with his wife and the assignments made pursuant thereto merely constituted an assignment of the petitioner's future income and that the amounts received by Mrs. Hall were income to the petitioner. This conclusion is based primarily upon . There an insurance agent received in 1913 commissions derived from renewal premiums paid on policies obtained by him and accepted by the company in earlier years. The Circuit Court of Appeals, Third Circuit, although recognizing a value in the contract, held that the commissions received in 1913 were income, and said:}

In each suit the important question is whether the act of 1913 taxes as income an agent's commissions that were actually received by him within the taxing period, if these commissions were derived from renewal premiums paid on policies that were obtained by him and accepted by the society in some earlier year. In our opinion, the answer is that the act does tax money thus received; the reason being that such money is "income" within the period during which it came into the agent's hands. The act (section 2, par. A, subd. 1) lays a tax on "the entire net income arising or accruing from all sources during the preceding calendar year," and goes on to declare in paragraph B that such "net income * * * shall include gains profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, businesses, trade, commerce, or sales or dealings in property, whether real or personal, growing out of the ownership or use of or interest in real or personal property, also from interest rent, dividends, securities, or the transaction of any lawful business carried on for gain or profit, or" (evidently in order to include by a drag-net clause any money that might have escaped even the sweeping words just quoted) "gains or profits and income derived from any source whatever, * * *" The Commissions in controversy appear to us to be embraced by this widely inclusive language. No doubt they were earned by work done and money spent in the earlier years; the agent's work was complete when he obtained the application and the society issued the policy; his right to commissions on future renewals came then into being, and he himself was required to do no more. He had earned his pay, and had received a part of it; to the rest, he then acquired a right, such as it was, but no determination could then be made how much the rest would be, and in no event could he receive it except in annual installments. Although the right had value, it lacked an essential element; no renewal premium might ever be paid, and in that event, he would receive nothing more; or renewals might be paid only in part and then he would be entitled to commissions on that part only. The insured might die before a given renewal fell due, or he might allow his policy to lapse, and in either event the right of the agent to future commission perished. The right, therefore, was contingent; his contracts so provided, for they declared that commission should accrue only as premiums should be paid in cash, and certainly until such payment should be made he had no collectible claim against the society. He had a property right that had value but contained also an element of risk, and unless he turned it into money it remained contingent. The act taxes money, or its equivalent, or its representative, and a contingent right such as this is not "income" in the sense used by the act.

If there was no return of capital in , (and it seems to us that the taxpayer's argument must rest upon the theory that the payments were a return of capital), it would follow, in this proceeding, that the petitioner did no more than attempt to assign future income, the payment of which, either to the petitioner or his assignee, were dependent upon conditions existing in the year of payment and unknown and contingent to that time.

Reviewed by the Board.

Judgment will be entered for the respondent.

PHILLIPS and MORRIS concur in the result.

GREEN and LOVE dissent.

SMITH

SMITH, dissenting: By the instrument executed by the petitioner on January 2, 1921, he sold, assigned, transferred, and delivered to his wife "an undivided interest in and to a certain contract." This was an irrevocable assignment of an interest in a subsisting contract, the substance of which was a right to receive annually, certain commissions on renewal premiums, as and when such premiums were paid to the company, and the assignment of such interest in that contract absolutely precluded petitioner from ever receiving that part of those commissions so assigned. In the prevailing opinion of the Board it is stated that the petitioner can not "succeed in this proceeding if the subject matter of his assignment has not come into being." It appears to me that the subject matter of the assignment here involved was in being at the date of the assignment. The opinion of the court in Woods v. Lewellyn,252 Fed. 106, is not determinative of the issue here presented. It would be determinative of the issue had the petitioner not made any assignment of his contract and had contended that the renewal premiums received in the years 1921 to 1924, inclusive, were not taxable income to him. But he makes no such contention. Furthermore, I do not think that it is true that the taxpayer's argument "must rest upon the theory that the payments were a return of capital."

I can not doubt that if the respondent had contended that the amounts received under the contract by petitioner's wife were taxable income to her, such contention would have to be sustained upon the authority of . In that case the decedent by will had created a trust and provided for the payment of a portion of the income of the trust to testator's son-in-law. It was held that such payments were taxable income of the son-in-law. The court quotes from section II of the Income Tax Act of 1913, and states in part:

* * * The language quoted leaves no doubt in our minds that if a fund were given to trustees for A for life with remainder over, the income received by the trustees and paid over to A would be Income of A under the statute. It seems to us hardly less clear that even if there were a specific provision that A should have no interest in the corpus, the payments would be income none the less, within the meaning of the statute and the Constitution, and by popular speech. In the first case it is true that the bequest might be said to be of the corpus for life, in the second it might be said to be of the income. But we think that the provision of the act that exempts bequests assumes the gift of a corpus and contrasts it with the income arising from it, but was not intended to exempt income properly so-called simply because of a severance between it and the principal fund. * * *

The language of the statute is equally applicable to a gift.

The tax laws do not contemplate that one shall be taxed on the income of another, even though the primary right to receive that income may have been in him, but irrevocably alienated prior to its receipt.

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Footnotes

• 1. This decision was prepared during Mr. Siefkin's term of office. ↩