Guaranty Trust Co. v. Commissioner , 15 B.T.A. 20 ( 1929 )

GUARANTY TRUST CO. OF NEW YORK, EXECUTOR, ESTATE OF LOUIS SHERRY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Guaranty Trust Co. v. Commissioner

Docket No. 10758.

United States Board of Tax Appeals

15 B.T.A. 20; 1929 BTA LEXIS 2937;

January 23, 1929, Promulgated

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In 1919, petitioner's decedent exchanged leaseholds for an annuity contract under the terms of which the said decedent was entitled to receive $100,000 per year during the remainder of his life. In 1921 and 1922 he received $100,000 and $99,999.96, respectively, in accordance with the terms of said agreement. Held, that the exchange in 1919 constituted a closed and completed transaction and that in determining whether a gain was realized in 1921 and 1922 on account of the annuity payments then received, the capital value of the contract in 1919 must be taken into consideration as an amount which may be returned free of tax. Held, further, that of the annuity payments received in 1921 and 1922, a gain was derived on account of each payment of the difference between the present worth of such payments in 1919 and the respective amounts received in 1921 and 1922.

Franklin C. Parks, Esq., for the petitioner.

J. E. Mather, Esq., for the respondent.

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LITTLETON

This proceeding involves deficiencies in income tax for 1921 and 1922 in the respective amounts of $37,665.26 and $35,215.84. The issue involved is whether certain annuities received by petitioner's decedent constitute taxable income. A motion was granted for a severance of issues, under which the questions now to be considered are whether the transaction in 1919 in which certain leaseholds then held by Louis Sherry were transferred to the Guaranty Trust Co. in consideration for the agreement of the aforesaid company to pay him an annuity of $100,000 during the remainder of his life constituted a closed transaction in 1919, and whether the leaseholds transferred were property of such nature that their March 1, 1913, value may be proven for purposes of determining taxable income for the years here on appeal. The facts were stipulated, from which we make the following findings.

FINDINGS OF FACT.

Louis Sherry was, at the time this petition was filed, an individual residing in New York City. He died on June 9, 1926, and upon a suggestion of death by his attorney of record, the Guaranty Trust Co. of New York was duly substituted as the petitioner herein.

In 1896 Louis Sherry leased certain property at the southwest corner of Fifth Avenue and 44th Street, New York City, from Isaac V. Brokaw and Josephine Brooks, a separate lease being made with each of the two last-named parties on account of their respective holdings. No consideration was paid for either lease other than the rentals reserved and duties and obligations assumed under the terms of said leases. The Brokaw lease was for a period of 21 years, expiring September 1, 1918, and the annual rental reserved thereunder was $120,000 per year. The Brooks lease was for a period of 21 years and 11 months, expiring September 1, 1918, and the annual rental reserved thereunder was approximately $7,500 per year. The Brooks lease contained no provision for renewal upon its expiration, but the Brokaw lease contained certain terms and conditions under which this lease might be renewed at the election of Sherry for two successive periods of 21 years. In general effect, the renewal leases were to be on the same terms and conditions as the original lease, except that the annual rental to be reserved was the sum of an amount equal to 4 1/2 per cent of the value of the land and 5 per cent of the value of the building at the date of renewal, but if such amount was determined to be less than that under the lease then expiring, the rental reserved under the lease then expiring would be the rental to be reserved under the new lease.

Louis Sherry remained continuously in the possession of the premises covered by the aforementioned leases until the termination of the leases on September 1, 1918. The business conducted by the said Sherry was that of restaurant and apartment house, and was known as "Sherry's."

In 1918 Louis Sherry renewed both of the aforementioned leases at an increased annual rental of $190,000, based upon a reappraisal of the premises. The term of each lease then entered into was 21 years.

On February 28, 1919, Louis Sherry gave an option to the Guaranty Trust Co. of New York to acquire all of his leasehold estate in the leases hereinbefore referred to as the Brokaw and Brooks leases, in consideration for an agreement on the part of the said Guaranty Trust Co. to pay to Sherry $100,000 upon the exercise of the option and $100,000 annually so long as Sherry should live. The option was exercised under two instruments, dated May 1, 1919, and June 1, 1919, under the terms of which Sherry conveyed all his right, title and interest under the aforesaid leases to the Guaranty Trust Co., and received in consideration therefor an agreement under which payments were to be made under the following terms and conditions:

WHEREAS by the terms of said option of February 28, 1919, said Trust Company agreed to execute and deliver an agreement to pay said Sherry annually the sum of One Hundred Thousand Dollars ($100,000) as follows:

Upon the delivery of the assignment to the above-mentioned leases free and clear of all encumbrances, One Hundred Thousand Dollars ($100,000); at the end of the thirteenth month thereafter Eight Thousand Three Hundred and Thirty-three and 33/100 Dollars ($8,333.33) each month so long as the said Sherry shall live, upon his death, there shall be paid to his estate a proportionate amount of Eight Thousand Three Hundred and Thirty-three and 33/100 Dollars ($8,333.33) equal to the proportion of the month which shall have elapsed prior to his death, and thereafter all payments shall cease; * * *

Louis Sherry was 63 years of age on September 24, 1919.

The expectancy of life of a person aged 63 years, according to acceptable mortality tables, in 1919, was 11.039 years. Louis Sherry died June 9, 1926.

The present worth at June 1, 1919, of an annuity of $100,000 per annum payable for 11.039 years is $846,412.

Louis Sherry received $100,000 during 1921 and $99,999.96 during 1922, from the Guaranty Trust Co. of New York, pursuant to the aforesaid agreements, and received payments in other years according to the terms of said agreements.

In his income-tax return filed for 1919, Louis Sherry made no report of gain or loss on account of the aforementioned sale of leaseholds to the Guaranty Trust Co., but he later filed an amended return in which he showed a capital gain on account of this transaction in the amount of $125,000.

The Commissioner determined Sherry's taxable income for 1919 by considering that the $100,000 cash received by Sherry from the Guaranty Trust Co. should be included as a part of his gross income and disallowed the contention that there was a sale of the leaseholds in this year in the manner contended for in the amended returns. As a result of the action taken by the Commissioner a deficiency of $1,746.26 was determined for 1919, from which an appeal was taken to this Board. After an answer had been filed by the Commissioner the petitioner's representative filed a motion to dismiss on the ground that "the petitioner is willing to pay the deficiency of $1,746.26 determined by respondent." This motion was granted.

In the determination of the deficiencies here in question for 1921 and 1922, the Commissioner included in gross income for these years the respective amounts of $100,000 and $99,999.96, the amounts heretofore referred to as having been paid to Sherry under the terms of the agreements in which Sherry conveyed certain leaseholds to the Guaranty Trust Co.

OPINION.

LITTLETON: Under the motion granted for severance of issues, the questions to be considered at this time are the following, which are contended for by the petitioner and denied by the Commissioner:

(a) That annuity payments in the amounts of $100,000 and $99,999.96 received by petitioner's decedent during 1921 and 1922, respectively, from the Guaranty Trust Company of New York, constituted the return of capital and may not be included in taxable net income for the reason that the sale by petitioner's decedent to said Guaranty Trust Company of a certain leasehold in consideration of an annuity of $100,000 was a closed transaction in the year 1919.

(b) That the leasehold sold by petitioner's decedent to said Guaranty Trust Company, being a renewal of an original leasehold which, prior to saidsale, expired and was renewed, in accordance with its terms, was property of such nature as may by competent evidence be shown to have had a basic value at March 1, 1913, greater than cost, for the purpose of determining gain or loss on sale at date or dates of sale subsequent to renewal date.

As to whether the transaction in 1919 is to be considered a closed transaction, we fail to see wherein a distinction can be made in the case at bar, as to this feature, and those presented in , affirmed by the Circuit Court of Appeals, Seventh Circuit, in , and also by the Circuit Court of Appeals, Eighth Circuit, in ); , and , wherein transactions substantially similar to the one here in question were considered complete in themselves, or an exchange of property for property in which a gain or loss might be considered as having been realized. In the transaction which we are now considering Sherry exchanged leaseholds for an annuity contract, both of which are well recognized as property. We are not impressed by the argument of the Commissioner that the annuity contract could not be considered as having a fair market value merely because it could not be foreseen in 1919 how long Sherry might live, and accordingly that this could not be considered a closed transaction. Admittedly, no one could tell in 1919 how long Sherry might live or that he might not die the next day after the sale took place, but we fail to see why this should make the annuity contract of no value, or render it incapable of valuation. In any annuity contract, where payments are to be made during the life of a given person, similar uncertainty exists, yet in the numerous cases which have come before the courts respecting the value for such contracts we do not find where the conclusion contended for by the Commissioner has been reached. In fact, the method usually adopted of determining the present value of future contingent interests in property by the use of mortality tables is so well recognized that the court said in , that "It is much too late to successfully assail a method so generally applied."

The argument that the annuity contract might not have had the full fair market value which would be shown by a determination of the present worth of an annuity of $100,000, based on the expected life usually shown for a man 63 years of age, because of peculiar conditions which may have surrounded Sherry's health when the transaction took place, is no answer, if conceded, to the proposition that the contract had a fair market value. Since annuity contracts are well recognized as having a value we see no insurmountable difficulties in fixing a fair market value based upon the peculiar conditions in an individual case. What the value was in this instance we are not now asked to determine, nor are we concerned with the gain or loss which may have arisen from the transaction for the reason that the year 1919 is not before us. We are of the opinion, however, that the exchange of the leaseholds for the annuity contract constituted a closed and completed transaction and that in the determination of whether gain was realized upon the receipt of annuity payments in 1921 and 1922, there must be taken into consideration the capital value of the contract in 1919, represented by its fair market value at that time.

We can not, however, agree with the petitioner that no income would be accountable for by Sherry subsequent to 1919 on account of annuity payments received until the entire capital value of the contract at date of receipt is returned. The cost to the Guaranty Trust Co. of the leaseholds acquired was the annuity contract given in exchange therefor, and the fair market value of this contract when received by Sherry would represent a capital value to him, or starting point from which we would determine the taxability of amounts received on account of this contract. (Cf. , and .) This capital value Sherry is entitled to have returned him free of tax, but when it is being returned in the form of annuity payments each payment received constitutes in part a return of capital and in part a gain. The capital returned in the annuity payments received in 1921 and 1922 would be the present worth of these amounts in 1919 when the annuity contract was received, and the gain derived from such payment would be the difference between the foregoing present worth of such payments and the total amount received. .

In view of the conclusion reached as to the first question presented, it becomes unnecessary to consider the second question presented. But since the issue as to the fair market value of the annuity contract is not now before us and since a determination of this issue is necessary before the correct deficiencies, if any, can be determined, the case is restored to the calendar for further proceedings consistent with this opinion.