DocketNumber： Docket No. 58199
Judges： Opper,Fisher,Drennen,Forrester
Filed Date： 2/27/1959
Status： Precedential
Modified Date： 11/14/2024
*226
Insured's election before maturity under insurance company's annuity policy to leave principal sum on deposit and receive monthly installments of principal augmented by interest and dividends,
*1064 Respondent determined a deficiency in income tax for calendar year 1950 in the amount of $ 10,445.32. Petitioners claim an overpayment of $ 1,289.06. The sole issue presented is whether petitioners' decedent constructively received taxable income in the amount of $ 21,384.63 in 1950 upon his election under a life annuity contract to substitute for the future annuity payments the insurer's simultaneous agreement to pay the principal in a different manner.
FINDINGS OF FACT.
Most of the facts were stipulated and are hereby found accordingly.
Petitioners' decedent, Harry Snider, hereafter called decedent, or the annuitant, and petitioner Lena Snider were husband and wife during 1950 and resided in Newton, Massachusetts. Decedent and Lena Snider filed their income tax return for 1950 with the collector of internal revenue for the district of Massachusetts.
On September 29, 1932, the Equitable Life Assurance Society of the United States, hereafter called Equitable, issued to decedent a life annuity contract No. X8,932,022. At that time decedent was 44 years of age.
Under the terms of the annuity contract Equitable agreed to pay to decedent a life annuity of*228 $ 13,896 per year, payable during his life in monthly installments of $ 1,158 beginning on the anniversary of the register date of the contract upon which the annuitant's age at near est birthday is 65 years. The consideration for this contract was the payment of annual premiums of $ 5,000 beginning on September 29, 1932, and concluding on September 29, 1953, the date on which the contract would mature.
The contract provided that decedent might at any time prior to commencement of the $ 1,158 monthly payment elect to receive, in lieu *1065 of the payments, a life annuity of a smaller amount or a refund annuity according to schedules of the contract.
The contract also provided:
OPTIONS ON SURRENDER OR LAPSE.
Within three months after default in the payment of any premium after one full year's premium has been paid, the Annuitant may surrender this contract and elect one of the following Options:
(a) CASH VALUE. To receive the Cash Surrender Value as provided in Schedule "C."
(b) PAID-UP LIFE ANNUITY. To purchase a non-participating paid-up life Annuity with monthly payments, commencing at the anniversary of the Register date of this contract upon which the Annuitant's age at*229 nearest birthday is 65 years, of an amount which shall bear the same ratio to the amount of the monthly Life Annuity payments (beginning at age 65) provided for on the first page hereof as the Cash Surrender Value at the date of default, accumulated until age 65 at 3 1/2% interest per annum, bears to the Cash Surrender Value which, if premiums on this contract were paid until age 65, would then be available hereunder. If, in accordance with this Option, this contract becomes paid-up and the Annuitant dies before any Annuity payment is due hereunder * * * [Equitable], upon receipt of due proof of such death and the surrender of this contract properly released, will pay, in the manner in which the Death Benefit hereof would have been payable if premiums had been duly paid until the date of such death, a sum equal to the Cash Surrender Value at the date of default accumulated until the date of the Annuitant's death at 3 1/2% interest per annum. Such paid-up Life Annuity may be surrendered by the Annuitant on any anniversary of the Register date of this contract for its cash value, which shall be an amount equal to the sum which would have been payable in event of the death of the Annuitant*230 at the date of such surrender.
If the Annuitant does not elect one of said Options within three months after such default, this contract will become a paid-up Life Annuity as provided under Option (b). The Annuitant's right to assign, terminate or change this contract shall extend to any paid-up benefits accruing hereunder.
The payment of any Cash Surrender Value may be deferred by * * * [Equitable] for a period not exceeding ninety days after receipt of application therefor.
If the annuitant died prior to the due date of the first annuity payment, Equitable agreed to pay a death benefit according to a schedule of the contract. Settlement of the death benefit was to be made --
with the Annuitant's wife, LEN [
Decedent reserved the right to change the beneficiary of the contract. Under this death benefit provision:
The Annuitant may elect to have any net sum due under this contract upon the death of the Annuitant prior to the due date of the first Annuity payment applied under one or more of the following optional modes of settlement in lieu of the lump*231 sum provided for on the first page hereof, and in the absence of such an election by the Annuitant, the beneficiary, after such death of the Annuitant, may so elect. The beneficiary, after such death of the Annuitant, may designate (with the right to change such designation) the person to whom any amount *1066 remaining unpaid at the death of the beneficiary shall be paid if there be no such person designated by the Annuitant and surviving. Such election, designation or request for change shall be in writing and shall not take effect until filed with * * * [Equitable] at its Home Office and endorsed upon the contract or the supplementary contract, if any.
| 1. Deposit Option: | Left on deposit with * * * [Equitable] at interest |
| guaranteed at the rate of 3% per annum, with such | |
| Excess Interest Dividend as may be apportioned. | |
| 2. Instalment Option: | Paid in a fixed number of equal annual, semi-annual, |
| Fixed Period. | quarterly or monthly instalments as set forth in the |
| following table. | |
| 3. Life Income Option: | Paid in equal annual, semi-annual, quarterly or |
| monthly instalments for five, ten or twenty years | |
| certain as may be elected and continuing during the | |
| remaining lifetime of the beneficiary as shown in | |
| the following table. | |
| 4. Instalment Option: | Paid in equal annual, semi-annual, quarterly or |
| Fixed Amount. | monthly instalments of such amount as may be |
| agreed upon until the net sum due under this | |
| contract together with interest on the unpaid | |
| balances at the rate of 3% per annum, and such | |
| Excess Interest Dividends as may be apportioned, | |
| shall be exhausted, the final payment to be the | |
| balance then remaining with * * * [Equitable]. If | |
| the interest and Excess Interest Dividend for any | |
| year shall be in excess of the instalments payable | |
| in such year, then the total amount of the | |
| instalments for the subsequent year shall be | |
| increased by the amount of such excess. |
*232 EXCESS INTEREST DIVIDEND: The foregoing Options are based upon an interest earning of 3% per annum; but if in any year * * * [Equitable] declares that funds held under such Options shall receive interest in excess of 3% per annum, the interest under Option 1, the amount of instalment under Option 2, the amount of income during the fixed period of five, ten or twenty years under Option 3 and the funds held under Option 4, shall be increased for that year by an Excess Interest Dividend as determined and apportioned by * * * [Equitable].
On September 14, 1950, decedent filed with Equitable an Election of Mode of Settlement relative to the annuity contract which provided in part:
I hereby surrender the said policy to * * * [Equitable] for its cash surrender value. In surrendering the said policy to * * * [Equitable], I understand that all rights, privileges and benefits under the said policy, except the right to apply the cash value proceeds under the option elected are hereby cancelled.
* * * *
Issue and attach to the said policy, such Riders as may be necessary to carry out my election and to secure all the rights, privileges and benefits available under * * * [Equitable's] Rules*233 and Regulations with respect to the Option elected.
* * * *
*1067 INSTALMENT OPTION -- FIXED AMOUNT:
Proceeds to be paid in monthly instalments of $ 1000.00 each until the amount so applied credited annually with interest on the unpaid balance at the rate of 3% per annum and any excess interest dividends which may be apportioned is exhausted, the final instalment to be the balance then remaining with * * * [Equitable]. Withdrawals of not less than $ 100. may be made upon request at any time, subject to * * * [Equitable's] right to defer payment of any amount withdrawable for a period not to exceed six months.
On September 20, 1950, the annuity contract was amended and provided in part:
If this contract be surrendered by the Annuitant for its Cash Surrender Value, the Annuitant, by written notice filed with * * * [Equitable] * * * at the time of such surrender, may elect to have the Cash Surrender Value, together with any unpaid dividends or dividend accumulations hereunder, applied under Options 1, 2 or 4 of the "Modes of Settlement at Death of Annuitant" herein set forth, but for the benefit of the Annuitant in lieu of the beneficiary under this contract. A supplementary*234 contract evidencing such election will then be issued by * * * [Equitable].
As of September 28, 1950, decedent had paid to Equitable net premiums on the annuity contract in the amount of $ 89,565.37, and the cash surrender value was $ 110,950.
On September 28, 1950, Equitable, pursuant to decedent's Election of Mode of Settlement, canceled annuity contract No. X8,932,022, and on September 29, 1950, issued to decedent supplementary contract No. 161,332 entitled "Instalment Bond." The supplementary contract provided in part:
[Equitable] * * * certifies that * * * [$ 110,950] is held, subject to the provisions hereinafter stated, as a fund to be credited annually with interest at the rate of 3% per annum on the unpaid balance, and from such fund * * * [Equitable] will pay, until the fund is exhausted, monthly instalments of ONE THOUSAND DOLLARS, the first instalment payable on September 29, 1950 and subsequent instalments monthly thereafter on the twenty-ninth day of every month * * *
If in any year * * * [Equitable] declares that funds held under this bond shall receive interest in excess of 3% per annum, the interest under this bond shall be increased for that year by an Excess*235 Interest Dividend as determined and apportioned by * * * [Equitable].
Each instalment becoming due shall be paid to HARRY SNIDER. At any time said HARRY SNIDER may withdraw the balance remaining under this bond or may make partial withdrawals therefrom of not less than ONE HUNDRED DOLLARS.
PARTIAL WITHDRAWALS PROVIDED FOR HEREIN MAY BE MADE WITHOUT EITHER THE SURRENDER OF THIS BOND OR ENDORSEMENT THEREON TO SHOW THE SAME.
Upon the death of said HARRY SNIDER, provided this bond is then in force, any instalments remaining unpaid shall be paid when due to said HARRY SNIDER's wife, LENA SNIDER. At the death of the survivor of said HARRY *1068 SNIDER and said wife, any balance remaining with * * * [Equitable] shall be paid to the executors or administrators of such survivor * * *
* * * *
The nominee, after the death of said HARRY SNIDER, may designate (with the right to change such designation) the person to receive any instalments remaining unpaid at the death of the nominee, if there be no such person designated by said HARRY SNIDER and surviving.
* * * *
Payment of any sum withdrawable hereunder may be deferred by * * * [Equitable] for a period not exceeding six months*236 after receipt of application therefor.
* * * *
This bond is issued in full settlement of Contract No. 8,932,022 * * *
Decedent did not constructively receive income in the amount of $ 21,384.63 in 1950.
OPINION.
In 1932 decedent secured a life annuity contract under the terms of which he could, upon the maturity of the contract in 1953, receive monthly specified payments for the remainder of his life. The contract entitled him prior to maturity to make certain life or refund annuities' elections, and in 1950, the instant tax year, and prior to maturity an alternative election was agreed upon between decedent and the insurance company pursuant to which he received the company's agreement to pay the principal sum, plus interest and dividends, in specified monthly installments until the principal should be exhausted. The principal could be withdrawn upon decedent's request "subject to the * * * [company's] right to defer payment of any amount withdrawable for a period not to exceed six months."
The conclusion urged by respondent, that because of this obligation to pay the principal, decedent was in constructive receipt in the instant tax year of the entire principal accumulated for*237 his annuity, can be reached only if there was no substantial impediment to his acquisition of the funds at any time he chose.
To constitute [constructive] receipt in such a case the income must be credited or set apart to the taxpayer
This seems to us to require that there could be no legal provision of real consequence upon which the debtor could rely in refusing immediate payment.
We think that cannot be said here. Even if decedent had made immediate demand for the entire sum, and even if it could be said that he would thereby suffer no serious detriment in his collateral rights, see, e.g.,
That the insurance company would not in reality have insisted upon this postponement, a fact of which decedent was apparently unaware, seems to us to make no difference. There was no doubt of the insurance company's complete legal control of the situation, which is inconsistent with the existence of control in petitioner. Any provision for the protection of one party may be waived by it. But we cannot say for that reason that it does not exist. See
The foregoing applies to respondent's theory that decedent constructively received the entire capital investment because he could demand the principal at any time. If respondent is seriously advancing an alternative argument that the income was received in the instant year because it is as though the annuity proceeds were paid to him in cash and he then reinvested them in the periodic payment contract, we are met with a flat rejection of that concept in respondent's own rulings.
A holder of an endowment policy who, prior to the maturity date, notifies the insurer of his election to receive the*240 proceeds under an option which provides for the payment of the proceeds in installments does not constructively receive the total amount of the proceeds on the date of maturity. * * * [
This theory was also repudiated in
*241 Petitioner was, to be sure, in the position where from the very inception of the policy he could demand its cash surrender value. Since this was an annuity agreement, this cash payment almost from the beginning would have been greater than the amount deposited by decedent. On that theory, which is not supported by any case, regulation or ruling, decedent would have constructively received each year the increase in the cash value of the policy. But even on that untenable hypothesis, in the year before us the only amount with the constructive receipt of which he could be charged would be the increment in that year.
And if it were to be argued, which it is not, that the form of words "I hereby surrender the said policy * * * for its cash surrender value" demonstrates that decedent did in fact receive the cash surrender value at that time, a reading of the entire paragraph in which that language appears prohibits any such construction. Immediately following those words decedent expressly reserves the right to the "privileges and benefits under the said policy" that the amount specified shall be applied "under the option elected." This would have been impossible had decedent in fact*242 surrendered the policy, and for that reason it is equally impossible to say that he elected to receive the cash surrender value of the policy or that he could "hereby surrender" the policy.
We conclude that decedent at no time elected to take the cash surrender value of the policy. Had he done so, he would have been required to surrender the policy completely. Instead he elected an option which under the policy, as amended, he was permitted to do, provided he did not surrender the policy. In some respects this is similar, though a stronger case, to the one dealt with in S.M. 5680,
The taxpayer, having exercised the first option, actually received the sum of 11x dollars [a cash dividend], and the question is, Did he constructively receive the further sum of 21x dollars which he would have received if he had exercised the third option [to take the paid-up value]? It is apparent that the taxpayer could not at the same time possess both his insurance and*243 the 32x dollars, which was payable only upon the cancellation of the policy. The only theory upon which it can be held that he constructively received the latter amount is that he, for the momentary period he is supposed to have been in *1071 constructive possession of this sum, had constructively surrendered his policy, a theory unknown to the law of insurance. * * * The only way by which the taxpayer could have acquired the guaranteed reserve was by the surrender of his policy and the loss of that which for 20 years he had paid to acquire. There can be no constructive receipt of that which can be acquired only by the surrender of valuable rights. * * *
This disposition of the case does not, to be sure, resolve the total problem. The 6 months in question expired in the following year and it may be, of course, that decedent can be charged with this income in that year. See
We do not suggest that respondent was to any extent unreasonable in seeking to place the receipt of the income in the instant year. Ever since the decision in
Murdock,
It is immaterial that he chose to go into another transaction with Equitable since that appears to have been a new arrangement made at arms length.
If the fact is that his words ("I hereby surrender the said policy to the Society for its cash surrender value") do not reflect what he did and he merely called*245 for further procedure under a valuable option given in that contract, so that there was no closed transaction for income tax purposes, that should be clearly shown by the facts. This route is complicated by the fact that the ultimate arrangement for payment was not an option under the contract at the time of the surrender on September 14, 1950.
I disagree with the discussion on constructive receipt, if that must be considered.
1. "
2. "Respondent has treated the transactions * * * as if the proceeds of the policies had been paid to petitioner in full at the time he surrendered the policies, and he had thereupon paid the money back to the companies in the purchase of annuities. Respondent contends that when the companies retained the proceeds of the policies instead of paying them to petitioner, he received the money constructively, and the transaction was the same, in substance, as one involving the purchase of annuities. * * *
"In our opinion, respondent's treatment of the transactions is incorrect. * * *"↩