Parshelsky v. Commissioner

FRANK, Circuit Judge.

In December 1934 and January 1935, the taxpayer Moses Parshelsky and his brother Isaac, pursuant to an agreement between them, each applied for, and there were issued to each of them, by insurance companies, five single premium annuity policies, the aggregate of the premiums paid by each brother being $200,000. The policies issued to Moses contained three provisions : (a) Isaac was made the annuitant during his lifetime; (b) if Moses survived Isaac, and if at the death of Isaac there existed an unpaid balance (i.e., an excess of the amount paid as premium over the amount of annuity payments theretofore made), then payments should be made in installments to Moses during his lifetime and, at his death, in a lump sum to his estate; (c) but if Moses should not be living at the death of Isaac, then any such unpaid balance should be paid in a lump sum to the estate of Isaac. On the basis of evidence of an actuarial expert, the Tax Court found that, of the $200,000, (a) $172,595.50 was paid for the first of these items, (b) $23,347.77 paid for the second, and (c) $4,056.73 for the 'third. In the policies applied for by, and issued to, Isaac, there were three similar but reciprocal items, Moses being named in the first, Isaac or his estate in the second, and Moses’ estate in the third; and the apportionment of the consideration as to these three items, as found by the Board on the basis of the actuarial testimony, was respectively $170,-141.64, $26,731.28 and $3,685.08.¹ Before, and at the time of, the purchase of these annuities, Moses and Isaac were each indebted to the United States for income taxes and to other persons, and knew that jeopardy assessments of taxes against them were being considered by the Commissioner of Internal Revenue, but did not know the amount of the taxes claimed by the Commissioner to be due and owing. Each of the policies provided, in one way or another, for exemption of payments from creditors’ claims. Isaac died in 1935 before he had received any payments under the policies and before any such payments became due or payable.

In the taxable year 1938 Moses received $14,390.50 as “remainderman” under the policies issued to Moses, and $14,980 as the original annuitant under the policies issued to Isaac. Before the taxable year, under the policies issued to Moses, he had received $42,871.50 and, under the policies issued to Isaac, $41,278.00.

§ 22 (b) (2) of the Revenue Act of 1938, c. 289, 52 Stat. 447, 26 U.S.C.A.Int.Rev.Code, § 22 (b) (2), provides: “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 [chapter] 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) of this paragraph * *

The Commissioner found a deficiency in Moses’ income tax for the taxable year 1938 and Moses petitioned the Tax Court for a redetermination thereof. The Tax Court found that Moses must be considered as the purchaser of the policies which his brother Isaac applied for and which were issued to Isaac, but that the consideration which Moses paid therefor was not $200,000 but only $173,826.62, that being the amount paid for the first and third items provided for in those policies. The court held that the balance of the $200,000 — i.e., $26,173.28 —must be regarded as the consideration paid by Moses for a transfer by Isaac to him of the right of Moses and his estate to receive payments, under the policies issued to Moses, upon Moses’ survival after Isaac’s death. Accordingly, on the basis of these facts, it held that, as Moses, before the taxable year, had received under the policies issued to him in which he and his estate had a remainder after Isaac’s death, more than the consideration of $26,173.28 paid by him for the transfer, the full amount received by Moses under those policies in the taxable year, i.e., $14,390.50, must be included in his gross income. It also held that, as, under the other policies, he had not received the full amount of the consideration of $173,826.62, there must be included in his gross income for the taxable year not the $14,980 received by him in that year under those policies, but only 3% of that consideration.

There was substantial evidence to support the Tax Board’s findings in general. But we disagree with its conclusion concerning the consideration paid by Moses. As above noted, the Tax Court found that Moses purchased the policies issued to Isaac. We think that the situation was as follows: As above noted, there were three items in the policies issued to Moses, the first item being for the benefit of Isaac, the second for the benefit of Moses or his estate, and the third for the benefit of Isaac’s estate. These items cost respectively $172,-595.50, $23,347.77 and $4,056.73. In the policies applied for and issued to Isaac, there were three similar but reciprocal items, the first being for the benefit of Moses, the second for the benefit of Isaac or his estate, and the third for the benefit of Moses’ estate. The first and third items in the policies issued to Moses were, in legal effect, transferred to Isaac, in consideration of the transfer by Isaac to Moses of the first and third items in the policies issued to Isaac. Accordingly, the consideration paid by Moses for the benefit to himself or his estate, under the policies issued to Isaac, was $176,652.23; this is the sum of the cost of the two benefits to Moses and his estate under those policies (i. e., the first and third items) ; for we agree with the Tax Court that the amount paid by Moses for both benefits should be lumped together and regarded as the pertinent “consideration” paid by him therefor. The second item in the policies issued to Moses was for the benefit of Moses himself and his estate; this he did not transfer but himself retained; the consideration paid by Moses for this item was $23,347.77.

On this basis, as Moses had received in the years before the taxable year, under the “remainder” to himself or his estate contained in the policies issued to Moses, a sum in excess of the consideration of $23,347.77 paid by Moses for that “remainder,” the entire amount received by him under those policies during the taxable year — i.e., $14,390.50 — must be included in his gross income. Under the policies issued to Isaac — the benefits of which to Moses or his estate were transferred to Moses — Moses has not received, before the taxable year and in the taxable year, an aggregate amount equal to the consideration of $176,652.23 paid by Moses for that.transfer; therefore, not the $14,980 received thereunder, but only 3% of that consideration of $176,652.23 should be included in Moses’ gross income for the taxable year.

The difference between the results of our conclusion and the figures as found by the Tax Court are relatively slight,² but we must remand for recomputation in accordance with this opinion.

Remanded.

1 The differences between the payments by Moses and Isaac for these items derive from the differences in their ages.

2 It is the difference between the inchision in gross income of 3% of $173,826.-62 and 3% of $176,652.23.