t c memo united_states tax_court estate of kenneth l lay deceased linda p lay independent executrix and linda p lay petitioners v commissioner of internal revenue respondent docket no filed date charles h egerton and jane dunlap callahan for petitioners stephen r takeuchi for respondent memorandum findings_of_fact and opinion goeke judge this case involves a deficiency of dollar_figure determined by respondent in the federal_income_tax of kenneth l lay and linda p lay the lays the deficiency is based upon respondent’s determination that the lays received income as a result of the sale of two annuity_contracts to enron corp enron for the reasons stated herein we find that they did not receive the income determined by respondent and are not liable for the deficiency findings_of_fact some of the facts have been stipulated and those facts are incorporated herein by this reference mrs lay resided in texas and the estate of mr lay was being administered in texas at the time the petition was filed the lays were married in mr lay was chairman of the board_of directors and chief_executive_officer of houston natural_gas corp when it merged in with internorth inc forming what became known as enron mr lay was chairman of the board_of directors and chief_executive_officer of enron from until date in enron hired jeffrey k skilling who later succeeded mr lay as chief_executive_officer in enron grew very rapidly during the 1990s into a company with big_number employees and became the seventh largest company in the united_states in the late 1990s the board_of directors of enron comprised individuals 1the members of the board_of directors of enron were kenneth l lay of enron robert a belfer of belfer oil gas norman p blake jr of general electric john h duncan of gulf western corp herbert s winokur of capricorn dr john mendelson of md anderson cancer center dr charles a lemaistre former chancellor of the university of texas system and past continued the board_of directors of enron also had committees that reported to the board_of directors including the compensation and management development committee compensation committee the compensation committee evaluated the compensation and made recommendations for the compensation paid to top-level officers the members of the compensation committee in were board_of directors members dr charles a lemaistre norman p blake jr john h duncan dr robert k jaedicke and frank savage the members of the compensation committee were not employed by enron and were not involved with companies in businesses similar to enron’s business dr lemaistre was the chairman of the compensation committee dr lemaistre also served on the executive committee of enron because of his position as chairman of the compensation committee the compensation philosophy at enron was to pay for and to reward an executive’s performance that created long-term shareholder value before and during the compensation committee had developed a pay-for-performance system for the continued president of md anderson cancer center in houston dr wendy l gramm economist and professor of economics at texas a m university dr robert k jaedicke former dean of stanford law school lord john wakeham a member of the british parliament ronnie chan a resident of hong kong paulo v ferraz pereira an industrialist from argentina and frank savage an industrialist from the east coast of the united_states the board_of directors of enron represented the shareholders interests and oversaw the activities of the company compensation of the senior officers of enron the compensation_for senior officers had three elements a base salary an annual bonus and a long-term incentive grant the compensation committee used the outside consulting firm towers perrin to provide compensation consulting services at the request of the compensation committee towers perrin provided a range of salaries for each position for which the compensation committee established the compensation using comparable companies towers perrin used comparable companies to establish the compensation ranges the compensation committee established a base salary for each position based on individual performance as measured against preestablished individual objectives set at roughly the 50th percentile of the pay for that position at the comparable companies the annual bonus was calculated on the after-tax net_income of enron creating a pool for the annual bonus and payable to the senior officers on the basis of their individual performances as measured against preestablished individual objectives such that the base salary and the annual bonus would be up to the 75th percentile of the pay for that position at the comparable companies the long-term incentive grant had two components stock_options and restricted_stock the restricted_stock was paid out in 4-year tranches and the 4-year period was used as the comparator the restricted_stock was paid out only if enron’s productivity measured up to the plan developed at the beginning of each year ie if enron performed like the top of comparable companies in most years or the top in some years the compensation committee set the compensation_for mr lay as chief_executive_officer and chairman of the board each year using the enron pay-for-performance methodology for setting compensation the compensation committee reviewed mr lay’s salary bonuses and long-term incentives over a period of years together with mr lay’s performance as compared with the plan of operation adopted for the year and the comparators for ceos and chairmen of the board in the mid-1990s mr lay was planning his retirement from the position of ceo of enron initially the compensation committee and the board_of directors considered rich kinder the chief operating officer coo of enron as the successor to mr lay as ceo of enron the compensation committee determined that mr kinder was well qualified to run the company on the basis of his experience as coo but asked mr kinder whether the compensation committee could continue to review his performance 2a tranche is a number of related securities that are part of a larger securities transaction a comparator is a device for comparing something with a similar thing or with a standard measure for another year to evaluate his potential as the ceo for enron mr kinder agreed to the additional year of review with the understanding that he would be able to leave enron with certain benefits if he was not elected to the position of ceo at the end of the 1-year period and the board_of directors approved the arrangement following the compensation committee’s recommendation at the end of the year the board_of directors decided to continue the arrangement for more year with mr lay as ceo chairman of the board and mr kinder as coo in accordance with the prior agreement mr kinder exercised his option and left enron in in order to become ceo of another company after mr kinder resigned from his position as coo the board_of directors elected mr skilling as president and coo of enron in december of as coo of enron mr skilling reported directly to mr lay the ceo of enron enron had hired mr skilling in and he had been the director of an innovative highly successful venture of enron the management of enron identified mr skilling as the future successor ceo mr lay thereafter recommended that mr skilling become the new ceo of enron the compensation committee and the board_of directors supported mr lay’s recommendation of mr skilling for the ceo position in date mr lay stepped down as ceo and mr skilling became ceo of enron mr lay remained chairman of the board_of directors of enron after enron announced that mr skilling was taking over as ceo mr lay received offers from other companies to take other positions in date stock prices were in general decline including the price of enron stock technology stocks in particular had fallen in the summer of and stock prices consequently fell throughout the market the compensation committee requested a stress test of enron’s financial condition because of concern over the falling stock prices the results of the stress test in date indicated that enron was financially sound even though enron stock prices had fallen mr lay was in final contract negotiations regarding a position with another company when mr skilling suddenly resigned from enron on date upon the unexpected resignation of mr skilling the board_of directors of enron immediately and proactively worked to persuade mr lay to take the ceo position again at enron the board_of directors determined that no other senior officer at enron was sufficiently trained and ready to step into the ceo position the board_of directors of enron wished to rehire mr lay as ceo and to retain mr lay for a long period in order to stabilize the company enron negotiated for mr lay to serve as ceo of enron and to remain in the ceo position for a period of years although mr lay had wished to retire as ceo of enron he agreed to return mr lay held a very large position in enron stock because of the long-term incentives earned over the years and he had a major requirement for liquidity enron and its advisers developed proposals with incentives to entice mr lay to reassume his position as ceo and to retain him for a period of years the compensation committee was interested in an agreement to retain mr lay for a period of years the subsequent sudden collapse of enron was unanticipated by the compensation committee during the negotiations with mr lay in date the instruments that enron would normally use for retention stock_options and restricted_stock both were problematic first because mr lay was over age and had served for more than years if he voluntarily retired all of his restricted_stock would immediately vest second enron’s stock plan documents limited the number of shares options or restricted shares that could be granted in year in accordance with a shareholder-approved plan and there was not time to hold a shareholder meeting to approve a modification to the plan accordingly alternatives for retention were considered at the request of the compensation committee towers perrin prepared alternatives for the compensation committee to offer to mr lay for consideration the alternatives prepared by towers perrin were based on two annuity_contracts owned by mr lay and mrs lay--the contracts which underlie the dispute in the present case mr lay purchased annuity no from the manufacturers life_insurance co of north america manulife on date kenneth l lay annuity mr lay paid premiums in the aggregate amount of dollar_figure million to manulife for the kenneth l lay annuity as follows date of payment premium payment_date date date total dollar_figure big_number big_number big_number annuity no issued by manulife was purchased for mrs lay on date linda p lay annuity premiums in the aggregate amount of dollar_figure million were paid to manulife for the linda p lay annuity as follows date of payment premium payment_date date date total dollar_figure big_number big_number big_number the annuity_contracts were titled flexible purchase payment deferred combination fixed and variable_annuity contract non- participating the owner of each annuity_contract could elect to step up the value of the annuity_contract to the market_value of the selected investments of the annuity_contract the annuity_contracts also had a guaranteed retirement income program feature referred to as the grip that guaranteed a 6-percent annual increase on the amounts invested in the annuity the owner of the annuity_contract could request that the annuity payments start years after purchase or if made years after an election to step up the value of the annuity to market_value using the greater of actual market_value of the investments in the account or the grip amount the grip amount as calculated over time with the 6-percent annual increase to the amount_paid for the policy was referred to as the income base mr lay elected to step up the value of his annuity_contract on date the income base of the kenneth l lay annuity on date was dollar_figure and the owner of the kenneth l lay annuity on the seventh anniversary of mr lay’s election to step up the policy value date was entitled to annuitize the guaranteed income base of dollar_figure pursuant to the terms of the kenneth l lay annuity the income base of the linda p lay annuity on date was dollar_figure and the owner of the linda p lay annuity on the seventh anniversary of the issuance of the policy date was entitled to annuitize the guaranteed income base in the approximate amount of dollar_figure the current income base reflected on the january to date john hancock statement for the linda p lay annuity pursuant to the terms of the linda p lay annuity the owner of the annuity_contract could make withdrawals from the amounts invested in the contract and could change the investment elections the annuity_contracts were issued in texas and provide that the governing law is texas law the annuity_contracts state that each owner may change the owner annuitant or beneficiary of his or her interest in the contract by written request in a form acceptable to us and which is received at our annuity service office the annuity_contracts provide an owner may assign his interest in this contract at any time prior to the maturity_date no assignment will be binding on us unless it is written in a form acceptable to us and received at our annuity service office we will not be liable for any payments made or actions we take before the assignment is accepted by us we will not be responsible for validity of any assignment mary k joyce was vice president of compensation of enron in as vice president mrs joyce worked closely with the compensation committee the compensation committee set pay philosophy particularly regarding executive compensation oversaw compensation plans selected consultants to provide advice regarding compensation and oversaw employee benefit plans mrs joyce acted at the direction of the compensation committee mrs joyce prepared the agenda and materials that were presented at each meeting of the compensation committee working directly with dr lemaistre and other members of the committee mrs joyce also obtained any reports that the compensation committee requested in connection with compensation and benefits when enron was developing proposals to attract mr lay to return as ceo dr lemaistre instructed mrs joyce to request proposals from towers perrin for use by the compensation committee that would provide liquidity and a retention device accordingly mrs joyce requested that towers perrin prepare proposals to attract mr lay by providing liquidity and to retain mr lay for a period of years by structuring a retention device the alternatives proposed by towers perrin were to lend funds to mr lay with the annuity_contracts as collateral to purchase the annuity_contracts for fair_market_value or to purchase the annuity_contracts for fair_market_value and then use the annuity_contracts as a retention device by awarding the acquired contracts to mr lay with a cliff_vesting schedule the term cliff_vesting means that the award vests in its entirety at the end of the vesting period rather than vesting ratably over the vesting period the compensation committee considered the alternatives and chose the third alternative to purchase the annuity_contracts both to provide immediate liquidity to mr lay and to use the annuity_contracts as a retention device by providing mr lay with the opportunity to have the annuity_contracts transferred back to him if he met certain contractually specified requirements and subject_to a cliff-vesting schedule the compensation committee rejected the first two options proposed by towers perrin because although they met mr lay’s requirement for liquidity the options did not provide a retention device as required by the board_of directors of enron towers perrin proposed a 25-year commitment from mr lay enron’s outside counsel vinson elkins assisted in structuring the annuities transaction at dr lemaistre’s request mrs joyce presented the proposed annuities transaction to the compensation committee at its meeting on date mrs joyce used two spreadsheets headed scenario and scenario in making her presentation of the towers perrin proposal to the compensation committee and to illustrate the differences of using the annuity_contracts as compared to enron stock to accomplish the board’s retention objective the spreadsheets showed that the lays had paid a total of dollar_figure million for the annuity_contracts dollar_figure million for each policy that the lays would receive a total of dollar_figure if they were to liquidate the contracts at that time and that the value of the annuity_contracts at that time was dollar_figure the only difference between the two spreadsheets presented at the meeting was the amount that would be paid for the annuity_contracts dollar_figure million as shown on scenario and dollar_figure on scenario because the purchase_price reflected on scenario was the amount that the lays would receive if they cashed in their annuity_contracts the compensation committee concluded that it would not provide any incentive for mr lay to return to enron as its ceo a requirement for the transaction the spreadsheets showed the benefits to enron and to mr lay of using the annuities transaction instead of using enron stock for the transaction especially the fact that the annuities transaction would not dilute enron stock and would provide mr lay with immediate liquidity the compensation committee determined on the basis of the information provided by towers perrin that the current fair_market_value of the annuity_contracts at the time of the transaction was dollar_figure following the discussion of the issues at its meeting on date the compensation committee approved scenario of the ken lay insurance swap analysis the scenario approved by the compensation committee was to acquire the annuity 3the spreadsheets also showed that the current floor value was dollar_figure and that the value in dollar_figure years would be dollar_figure contracts for dollar_figure million each dollar_figure million total and also to provide mr lay the opportunity to earn back the annuities at the end of a 25-year cliff-vesting period or upon certain terminations outside mr lay’s control the compensation committee therefore authorized enron to pay dollar_figure million for two annuity_contracts worth dollar_figure the compensation committee authorized the officers of enron to execute and deliver all documents necessary or appropriate to carry into effect the approved annuities transaction the board_of directors of enron approved the transaction at its meeting on date the compensation committee concluded that the proposed purchase of the annuity_contracts would provide mr lay with liquidity and was a good investment for enron the plan approved by the compensation committee had two distinct elements first as part of the package of inducements offered to mr lay in exchange for abandoning his plans to retire and agreeing to reassume the responsibilities of ceo of enron enron agreed to purchase both of the annuity_contracts from mr and mrs lay for dollar_figure million second as a retention device enron agreed that if mr lay neither resigned without consent nor was removed for certain specified reasons as chairman of the board and ceo of enron before the expiration of a 25-year term it would reconvey the annuity_contracts to mr lay upon completion of his service commitment the lays accepted the offer to sell their annuity_contracts for dollar_figure million each dollar_figure million total and mr lay accepted the offer to earn back the annuity_contracts as a long-term incentive award if he remained with enron for the 25-year term or left the employment of enron for certain reasons outside his control following mr skilling’s resignation the board_of directors of enron elected mr lay to the position of ceo of enron enron prepared a purchase sale and reconveyance agreement agreement to memorialize the terms of the agreement that enron negotiated with mr lay the enron legal staff worked with its outside counsel vinson elkins to prepare the agreement mr lay mrs lay and enron entered into the agreement on date mrs joyce executed the agreement on date on behalf of enron in her capacity as a vice president of enron the lays executed and delivered the agreement to enron on date the agreement required enron to deliver dollar_figure million by certified check or wire transfer to the lays at the closing of the purchase of the annuity_contracts the agreement also required the lays before or simultaneously with the tender of the purchase_price to them to i complete fully and accurately the personal information change form change form for each of the contracts directing a change in ownership of that contract to enron and designating enron as sole and primary beneficiary to receive any death_proceeds paid under the contracts ii execute and submit the change forms to enron and iii transfer the originals and all copies of the contracts in their possession to enron the change forms attached to the agreement to be used to transfer the annuity_contracts to enron are the forms provided by manulife for this purpose the change form required the signature of the current owner the change form also required the signature of the new owner if the change form was being used to change the owner the change form states please complete this personal information changes form with appropriate signatures and mail to manulife north america’s product administration department in order to transfer the kenneth l lay annuity to enron mr lay executed the change form to change the owner and beneficiary of the kenneth l lay annuity to enron mr lay delivered the executed original change form with the original annuity policy contract no to enron on date mrs joyce executed the change form for the transfer of the kenneth l lay annuity to enron on behalf of enron as the new owner of the kenneth l lay annuity on date in order to transfer the linda p lay annuity to enron mrs lay executed the change form provided by manulife to change the owner and beneficiary of the linda p lay annuity to enron mrs lay delivered the executed original change form with the original annuity policy contract no to enron on date mrs joyce executed the change form for the transfer of the linda p lay annuity to enron on behalf of enron as the new owner of the linda p lay annuity on date mrs joyce received the original annuity_contracts that the lays delivered to enron on date enron transferred dollar_figure million to the bank account of the lays by wire transfer on date in exchange for the two annuity_contracts there is an issue regarding the date that the change forms were submitted by enron to manulife and whether the originals or copies were transmitted mrs joyce delegated the responsibility for submitting the change forms to manulife on behalf of enron to aaron brown the director of compensation_for enron mrs joyce and mr brown both believed that the original change forms had been submitted to manulife on or shortly after date mr brown stated to a manulife employee that he had provided the original change forms to manulife at the time of the annuities transaction after date enron representatives asked manulife why it had not yet processed the change_of_ownership of the annuity_contracts in accordance with the change forms mr brown transmitted the fully executed change forms from enron to manulife by facsimile on date the facsimile cover sheet was addressed by mr brown to gretchen swanz of manulife and contained the following instructions to manulife gretchen please facilitate the transfer of ownership beneficiary of these policies to enron ms swanz then sent an email to mr brown on date requesting that he send the original change forms mr brown responded by email dated date that certified copies of the originals would be provided manulife corresponded with enron regarding the change forms manulife did not contact mr or mrs lay regarding the change forms in manulife acquired and merged with john hancock life_insurance co john hancock john hancock became the wholly owned subsidiary of manulife and succeeded to all of the u s operations of manulife and the former john hancock life_insurance co john hancock therefore is the insurance_company that is currently the party to the annuity_contracts and has the records regarding the annuity_contracts john hancock has copies of the fully executed agreement and the fully executed change forms in its files the lays reported the annuities transaction on their tax_return on schedule d capital_gains_and_losses as a sale of each annuity_contract for dollar_figure million mr lay and mrs lay each had an adjusted_basis of dollar_figure million in the annuity_contract sold by him or her to enron pursuant to the agreement the lays reported zero gain_or_loss on the sale of the annuity_contracts on the basis of a sale price of dollar_figure million for and an adjusted_basis of dollar_figure million in each of the annuity_contracts sold to enron pursuant to the agreement enron issued a form_w-2 wage and tax statement to mr lay for the calendar_year to report the compensation it paid him that form_w-2 did not include in mr lay’s compensation any part of the dollar_figure million that enron paid for the annuity_contracts however in pursuant to an agreement with the internal_revenue_service irs enron issued an amended form_w-2 to mr lay for reporting the dollar_figure million as compensation on date the board_of directors requested that mr lay resign and he resigned as chairman of the board_of directors and ceo of enron with the consent of the board_of directors in date enron filed a petition for chapter bankruptcy on date in the u s bankruptcy court for the southern district of new york in a case styled in re enron debtor chapter case no jointly administered bankruptcy case enron listed the annuity_contracts purchased from the lays as assets on schedule b personal_property of its statement of financial affairs initial and amended filed in the bankruptcy case the official committee of unsecured creditors of enron filed a complaint and an amended complaint in the bankruptcy case to avoid the annuities transaction the complaint as amended has been consolidated with the remaining insolvency proceedings in the bankruptcy case and remains pending on date enron’s fifth amended plan was confirmed in the bankruptcy case pursuant to the fifth amended plan the enron creditors recovery corporation was formed as the successor to enron john hancock filed a motion to intervene and file its interpleader complaint in the adversary proceeding on date alleging that the ownership of the annuity_contracts is disputed between enron and mrs lay and requesting that the bankruptcy court determine the ownership of the annuity_contracts because the irs took the position that the lays owned the annuity_contracts after the annuities transaction in order to test the status of the ownership of the annuities mrs lay requested a partial withdrawal of dollar_figure from the linda p lay annuity that she had transferred previously to enron in a withdrawal request form submitted to john hancock on date the annuity_contracts allow withdrawals from the contract value in response to mrs lay’s request john hancock did not pay the requested withdrawal and instead responded with a letter to mrs lay describing issues regarding the ownership of the linda p lay annuity in its letter dated date john hancock described the agreement quoting portions regarding the transfer to enron and the reconveyance obligation the change form submitted to manulife and the fact that mr lay had ceased serving as ceo and chairman then concluding it was unable to determine whether mr lay or mrs lay had an ownership_interest on date mr lay died suddenly mrs lay is the independent executrix of the estate of kenneth l lay the form_706 united_states estate and generation-skipping_transfer estate_tax_return filed for mr lay’s estate listed the claim against enron for the annuity_contracts as a claim on schedule c mortgages notes and cash and listed the claim of enron for the annuity_contracts on schedule k debts of the decedent as a contested claim neither of the annuity_contracts had been conveyed to mrs lay or to the estate of kenneth l lay as of the trial date in this case neither mr lay or his estate nor mrs lay ever received any distributions from either manulife or john hancock with respect to either of the annuity_contracts no death_benefit has been paid pursuant to the annuity_contracts on account of mr lay’s death the lays timely filed their joint federal tax_return for tax_year on date respondent issued a statutory_notice_of_deficiency to petitioners in which respondent determined a deficiency in income_tax for the year ended date of dollar_figure petitioners timely filed a petition in this court on date opinion i burden_of_proof petitioners would generally bear the burden_of_proof in this case see rule a 503_us_79 292_us_435 the burden_of_proof on factual issues that affect a taxpayer’s liability for tax may be shifted to the commissioner where the taxpayer introduces credible_evidence with respect to such issue sec_7491 on the record before us we do not need to reference the burden_of_proof to resolve this case as the facts are adequately presented therefore we need not determine whether sec_7491 is applicable ii sale of annuity_contracts respondent argues that the lays did not sell the annuity_contracts and that the dollar_figure million they received was an employee cash bonus includable in income for the taxable_year the issue therefore is whether the lays sold their annuity_contracts to enron in date in accordance with the agreement there is no question the agreement was executed and that the lays acted in accordance with the agreement as we understand respondent’s position respondent maintains the 4all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code agreement was not made in good_faith and that enron and the lays never intended to transfer the annuity_contracts but rather enron simply paid mr lay dollar_figure million gross_income includes gains from the sale of property sec_61 sec_1001 the gain from the sale of property is calculated as the amount_realized from the sale less the adjusted_basis in the property sec_1001 the basis is ordinarily the cost of the property sec_1012 this calculation of gain allows the taxpayer’s investment in the property to be recovered tax free before any requirement to report a taxable gain on the sale sec_1011 pursuant to the agreement the lays sold each of the annuity_contracts to enron for dollar_figure million for a total of dollar_figure million the amount_realized on the sale of each annuity_contract therefore was dollar_figure million the lays had paid dollar_figure million for each annuity_contract and had not withdrawn any amount or received any distributions with respect to either of the annuity_contracts accordingly the lays had an adjusted_basis in each annuity_contract of dollar_figure million the lays therefore reported zero gain upon the sale of the annuity_contracts in a state law the term ‘sale’ is given its ordinary meaning for federal_income_tax purposes and is generally defined as a transfer of property for money or a promise to pay money 77_tc_1221 citing 380_us_563 state law determines the nature of property rights and federal_law determines the appropriate tax treatment of those rights 363_us_509 the agreement memorializes a contractual understanding of the lays with enron the agreement sets forth the sale of the annuity_contracts to enron enron then used the annuity_contracts it purchased as the long-term incentive for mr lay also provided in the agreement the agreement also provides that enron agrees to make a future conveyance of the annuity_contracts to mr lay should he remain employed by enron for dollar_figure years or upon certain earlier terminations of employment outside his control only the sale evidenced by the agreement is directly at issue in this case ie whether the lays sold their annuity_contracts to enron in 5mr lay remained employed by enron through the end of and therefore there is no issue of whether the annuity_contracts were reconveyed to mr lay in in accordance with the agreement the issue of whether mr lay is entitled to the reconveyance of the annuity_contracts arises in upon the termination of mr lay’s employment with enron and is at issue in the enron bankruptcy case in which enron listed the annuity_contracts as assets and john hancock has filed a request for the bankruptcy court to resolve the issue the agreement and the annuity_contracts all provide that texas law governs the rights and interests of the parties to the annuity_contracts therefore must be determined by applying texas law texas law allows the assignment of any rights under an annuity_contract in accordance with the terms of the contract tex ins code ann art sec_4 west state law permitted the lays the owners of the annuity_contracts to assign the annuity_contracts to enron in accordance with the terms of the annuity_contracts the terms of the annuity_contracts permitted the transfers of the annuity_contracts the annuity_contracts provide an owner may assign his interest in this contract at any time prior to the maturity_date no assignment will be binding on us unless it is written in a form acceptable to us and received at our annuity service office we will not be responsible for validity of any assignment the annuity_contracts further provide that each owner may change the owner annuitant or beneficiary of his or her interest in the contract by written request in a form acceptable to us and which is received at our annuity service office accordingly the terms of the annuity_contracts permitted the lays to sell the annuity_contracts to enron and the sale was allowed pursuant to texas law b enron enron and the lays entered into a contract for the purchase and sale of the annuity_contracts on date enron agreed in the agreement to purchase the annuity_contracts for dollar_figure million per contract the agreement evidencing the annuities transaction was authorized by the compensation committee the compensation committee of the board_of directors made up of independent directors structured reviewed and approved the annuities transaction and the committee’s actions were thereafter reported to enron’s full board_of directors enron developed and proposed the annuities transaction after the unexpected resignation of mr skilling and the determination by the board_of directors that no one other than mr lay was ready to step into the ceo position at that time the board_of directors immediately worked to attract mr lay to return to the ceo position at enron the compensation committee requested that towers perrin enron’s compensation consultant develop proposals to persuade mr lay to reassume the ceo position and to remain at enron for a period of years the compensation committee instructed towers perrin that the proposals should address mr lay’s need for liquidity and the board_of directors’ requirement to include a method for retaining mr lay in the ceo position for a period of years because mr lay was over age and had served for more than years any restricted_stock enron gave him would immediately vest if he retired and restricted_stock was not an acceptable means for retention from mr lay’s perspective towers perrin valued the annuity_contracts at dollar_figure in date towers perrin proposed the following alternatives for consideration by the compensation committee to lend funds to mr lay with the annuity_contracts as collateral to purchase the annuity_contracts or to purchase the annuity_contracts and then use the annuity_contracts as a retention device as an award to mr lay with a cliff-vesting schedule the compensation committee considered the recommendations by towers perrin and chose the third alternative because it accomplished both of the requirements established by the compensation committee first the purchase of the annuity_contracts met the requirement to provide liquidity to mr lay as an inducement to reassume the ceo position second the use of the annuity_contracts as a retention device for mr lay met the requirement for a retention device the compensation committee and the board_of directors as a whole approved the annuities transaction in good_faith after careful consideration these facts are supported by the agreement and the credible testimony at trial c annuity_contract requirements in order to transfer the annuity_contracts to enron the lays executed the change forms provided by manulife and delivered the executed change forms with the original annuity_contracts to enron at the closing conference with mrs joyce on date mrs joyce also executed the change forms on behalf of enron on date the lays executed the change forms provided by manulife and made the assignment in a written request in a form acceptable to manulife as required by the terms of the annuity_contracts each of the lays executed a change form to transfer his or her annuity_contract to enron on date and delivered the change form to enron as required by the change forms for a change in ownership of an annuity_contract mrs joyce executed the change forms on date on behalf of enron enron thereafter delivered the change forms to manulife whether the delivery conformed to manulife’s requirements to transfer the ownership of the annuity_contracts is disputed but we find no effort to abort the transfer in the actions taken by enron’s employees and we also find the lays acted in accord with the agreement to fulfil their contractual obligations to transfer the annuity_contracts in summary on date the lays met all the requirements of the agreement to transfer the annuity_contracts and enron paid the consideration d manulife in connection with the annuities transaction it is not clear whether enron sent the original change forms to manulife mrs joyce and mr brown both believed the originals were sent to manulife on or shortly after date enron did in fact send the change forms to manulife by facsimile transmission manulife however did not change the ownership of the annuity_contracts on its books manulife stated that the reason it did not transfer title on its books is that it did not receive the originals of the fully executed change forms the change forms state that the forms should be mailed to manulife which perhaps could be construed as a request for the original but the annuity_contracts do not include this requirement the annuity_contracts require a written request in a form acceptable to us enron had all of the legal documents necessary to perfect its title in the annuity_contracts moreover enron conducted itself as if it had acquired the annuity_contracts mr brown of enron inquired of manulife why the annuity_contracts had not been transferred on its books to enron he informed manulife that he had submitted the original change forms mr brown then transmitted the fully executed change forms to manulife by facsimile enron was the beneficial_owner of the annuity_contracts in accordance with the agreement even though manulife failed to note the transfer of title on its books the status of the legal_title to the annuity_contracts does not control in determining whether a sale occurred beneficial_ownership and not legal_title determines ownership for federal_income_tax purposes 71_tc_346 affd without published opinion 652_f2d_65 9th cir 55_tc_866 affd 457_f2d_1165 5th cir the federal_income_tax consequences of property ownership generally depend upon beneficial_ownership rather than possession of mere legal_title 630_f2d_554 7th cir affg tcmemo_1979_120 61_tc_268 ‘ c ommand over property or enjoyment of its economic benefits’ which is the mark of true ownership is a question of fact to be determined from all of the attendant facts and circumstances 109_tc_235 quoting 95_tc_74 this court has stated that a sale occurs upon the transfer of the benefits_and_burdens_of_ownership rather than upon the satisfaction of the technical requirements for the passage of title under state law 79_tc_570 the determination of whether the benefits_and_burdens_of_ownership have been transferred is one of fact and is based on the intention of the parties evidenced by their written agreements and the surrounding facts and circumstances 85_tc_754 affd 849_f2d_393 9th cir grodt mckay realty inc v commissioner t c pincite ragghianti v commissioner supra pincite beneficial_ownership is marked by command over property or enjoyment of its economic benefits 74_tc_1513 stock was sold in accordance with an agreement for the sale even though the title to the stock was not transferred in accordance with the agreement of the parties for example in pac coast music jobbers inc v commissioner supra pincite this court considered whether the individual taxpayer hansen purchased the stock of the corporate taxpayer pacific coast music jobbers from three other shareholders in pursuant to agreements executed in taxpayer hansen negotiated to acquire all of the stock of pacific coast music jobbers and entered into two agreements with the shareholders whereby the sellers received payments over a 5-year period during which the stock was held in escrow the issues in pac coast music jobbers inc were whether hansen acquired the stock upon execution of the agreements and thus became a shareholder required to consent to the corporation’s s election and if hansen became a shareholder whether the amounts paid out to the selling shareholders were constructive dividends to hansen this court stated for purposes of federal income_taxation the determination of whether a sale has occurred centers more on the question of which party as a result of the transaction has command or domination over the property rather than on the refinements of title a court must consider not only when the bare_legal_title passed but also when the benefits and burdens of the property or the incidents_of_ownership were acquired or disposed of in a closed transaction in deciding the question the court looks to that party to the transaction who has the greatest number of the attributes of ownership a court should look to practicalities disregarding merely formal and not useful rights and attributes if it is found from all the facts and surrounding circumstances that the parties intended an agreement to result in the sale of property and the agreement transfers substantially_all the accouterments of ownership the transaction will be treated as a sale even though the parties intended the legal_title should not pass until later id in pac coast music jobbers inc the court held that hansen acquired the stock upon execution of the agreements and not years later when the payments were complete and the stock was transferred from the escrow this court concluded that the total of the payments that hansen was required to make to the sellers established the purchase_price and that hansen acquired the stock by means of a bootstrap purchase using the profits from the corporate operations to acquire the business the escrow arrangement supported the conclusion that a sale had occurred because the sellers had nothing further to do but collect the sale price and hansen was getting the benefit of the corporate dividends this court noted that the sellers gave up significant rights to alter or end the business of the corporation by their agreement to continue the corporate business and the sellers also lost substantial domination and control because they gave hansen their irrevocable proxies although the sellers’ attorney in pac coast music jobbers inc v commissioner supra pincite retained the stock in escrow it was reasoned that the important fact is not when the parties intended title to change hands but when they intended the accouterments of ownership to be transferred the lays gave up all rights to alter or terminate the annuity_contracts and lost domination and control_over them after selling the annuity_contracts to enron the lays could not sell them nor could they liquidate them or borrow against them they also could not alter the investment options for the annuity_contracts or make any other elections or decisions regarding them the lays had delivered the transfer documents and received the consideration for the sale and there was nothing else for them to do in connection with the transfer of the annuity_contracts to enron enron on the other hand was able to use the annuity_contracts for the retention agreement enron also could make cash withdrawals and alter the investment options in the annuity_contracts enron therefore had dominion and control_over the annuity_contracts unlike the situation in pac coast music jobbers inc the entire purchase_price was paid at the closing of the annuities transaction on date in addition whereas the sellers in pac coast music jobbers inc placed the stock at issue in escrow held by their own attorney the lays transferred the annuity_contracts with the fully executed change forms to enron on date with no restrictions on the transfer of legal_title enron was in control_over completing the transfer of legal_title on the books of manulife this is not a situation where the seller has retained control_over the legal_title to the property with the resulting issue of whether the seller’s retention of title prevented a sale from occurring see yelencsics v commissioner supra pincite taxpayers purchased stock pursuant to an agreement with the selling shareholder that gave the taxpayers unqualified voting proxies control of the corporation and entitlement to all profits and dividends even though the selling shareholder remained the owner of record 71_tc_346 shareholder acquired stock upon posting a bond required by state law to ensure payment of purchase_price even though the selling shareholders continued to hold the stock enron also used the annuity_contracts purchased from mrs lay for the retention agreement with mr lay the use of the annuity_contracts as consideration for this agreement therefore confirms that enron was the beneficial_owner of the annuity_contracts even after enron entered into the agreement with mr lay to reconvey the annuity_contracts after his service commitment enron remained the beneficial_owner of the annuity_contracts enron possessed the annuity_contracts and had the right to possess the annuity_contracts and fully received the benefits of ownership as the owner of the annuity_contracts enron also bore the risk of any loss in connection with owning the annuity_contracts the lays reported the transaction as a sale of the annuity_contracts on their tax_return enron did not include the purchase_price on mr lay’s original form_w-2 for after purchasing the annuity_contracts enron filed for bankruptcy on date and listed the annuity_contracts as assets enron’s position therefore was that it had purchased the annuity_contracts john hancock confirmed that it did not consider mrs lay to be the owner notwithstanding the legal_title on its books enron issued amended forms w-2c corrected wage and tax statement to mr lay in in connection with enron’s settlement of an employment_tax audit with the irs appeals_office we do not find this after-the-fact event relevant to the case before us the district courts in texas have concluded that the execution of agreements controls in situations where formal filings have not been accomplished keller v united_states aftr 2d ustc par big_number s d tex church v united_states aftr 2d ustc par big_number w d tex affd per curiam 268_f3d_1063 5th cir in church such a partnership_agreement executed by the parties governed even though a certificate of limited_partnership had not been filed with the state before the death of one of the parties to the partnership_agreement the court held that the written partnership_agreement was an enforceable contract and governed the rights of the parties church v united_states supra the execution of the partnership_agreement in church also accomplished the transfer of the beneficial_interest in securities held in the decedent’s paine webber account to the partnership under texas and federal_law with no execution or submission of a change form to paine webber the court in keller v united_states supra followed church and held that the execution of a partnership_agreement reflecting certain bonds as assets of the partnership before the transferor’s death accomplished the transfer of the bonds to the partnership even though no request for a change was submitted to vanguard the company holding the bonds the lays agreed to sell the annuity_contracts to enron and executed and delivered all documents required to effect the transfer of legal_title to the annuity_contracts to enron in accordance with the agreement the transferor in each of the church and keller cases had not even executed a transfer form to transfer the ownership of the securities at issue to the partnership before the transferor’s death whereas the lays had fully executed and delivered the change forms to enron and enron had transmitted the change forms to manulife the reasoning of church and keller therefore supports a finding that the lays sold the annuity_contracts e conclusion the lays sold the annuity_contracts to enron on date in doing so they complied with the requirements of the agreement and took the steps required to transfer the annuity_contracts to enron the benefits and risks of ownership of the annuity_contracts were transferred to enron in the annuities transaction the lays therefore properly reported the transaction on their federal_income_tax return as a sale of the two annuity_contracts iii sec_83 respondent’s first alternative position is that the agreement provided for the transfer of the annuity_contracts by enron to the lays on date in_connection_with_the_performance_of_services by mr lay and therefore caused the fair_market_value of the property to be taxable to mr lay pursuant to sec_83 sec_83 provides in pertinent part that if property is transferred to a taxpayer in_connection_with_the_performance_of_services the excess of the fair_market_value of the property over the amount if any paid for the property shall be included in the taxpayer’s gross_income in the first taxable_year in which the taxpayer’s rights in the property are not subject_to a substantial_risk_of_forfeiture see 117_tc_237 affd 65_fedappx_508 5th cir sec_1_83-7 income_tax regs consequently taxability pursuant to sec_83 would result only if the provision in the agreement that granted mr lay the opportunity to earn back the annuity_contracts if he remained with enron for a period of dollar_figure years or an earlier date if mr lay’s employment terminated for certain specified reasons beyond mr lay’s control constituted property that was transferred to mr lay in in connection with his performance of services and the property was transferable by mr lay or not subject_to a substantial_risk_of_forfeiture in see sec_83 the term property for purposes of sec_83 includes real and personal_property other than either money or an unfunded and unsecured promise to pay money or property in the future the term also includes a beneficial_interest in assets including money which are transferred or set_aside from the claims of creditors of the transferor for example in a_trust or escrow account 6respondent has not alleged that enron retransferred the annuity_contracts to either mr lay or mrs lay in sec_1_83-3 income_tax regs property is transferred for purposes of sec_83 when a person acquires a beneficial_ownership interest in such property sec_1_83-3 income_tax regs unfunded and unsecured promises to transfer property in the future are excepted from the definition of property for purposes of sec_83 sec_1_83-3 income_tax regs the provisions of the agreement that granted mr lay the right to earn back the annuity_contracts if he continued to render services for dollar_figure years create an unfunded and unsecured promise to transfer property in the future enron agreed to transfer the annuity_contracts to mr lay in the future upon his completion of dollar_figure years_of_service the annuity_contracts were not transferred or set_aside from the claims of creditors of the transferor in fact enron listed the annuity_contracts as assets upon filing for bankruptcy mr lay was required to perform services before his right to receive the annuity_contracts ripened and he could not assign his retention agreement the promise in the agreement to reconvey the annuities to mr lay after dollar_figure years_of_service therefore is not property within the meaning of sec_83 consequently the threshold requirement for application of sec_83 that property be transferred to the service provider is not met this arrangement between enron and mr lay for enron to transfer property to mr lay if he provided services for a period of years is a nonqualified_deferred_compensation_plan not taxed at inception because the property was not set_aside or protected from the creditors of enron see sec_83 sec_1_83-3 income_tax regs deferred_compensation for services is included in gross_income in the taxable_year in which it is actually or constructively received sec_1_451-1 income_tax regs income is included in income for the taxable_year in which actually or constructively received by the taxpayer sec_1 c i income_tax regs under the cash_method_of_accounting gross_income is included for the taxable_year in which actually or constructively received revrul_60_31 1960_1_cb_174 a mere promise to pay not represented by notes or secured in any way is not a receipt of income for a cash_method taxpayer revrul_60_31 c b pincite income is constructively received in the taxable_year in which it is credited to the taxpayer’s account or set apart for the taxpayer so that he may draw upon it at any time 16_tc_244 affg 194_f2d_541 6th cir sec_1_451-2 income_tax regs however income is not constructively received if the taxpayer’s control of its receipt is subject_to substantial limitations or restrictions sec_1_451-2 income_tax regs mr lay had no control_over the annuity_contracts in enron’s listing the annuity_contracts as assets when it filed for bankruptcy confirms that the annuity_contracts were not set_aside for mr lay mr lay would constructively receive the annuity_contracts only after the dollar_figure years_of_service or upon an earlier termination that triggered the conveyance of the annuity_contracts to mr lay under the terms of the agreement none of which occurred in sec_83 requires inclusion of the fair_market_value of the property in income when the property is first either transferable or not subject_to a substantial_risk_of_forfeiture rights of a person in property are transferable if the person may transfer any interest in the property to any person other than the transferor but only if the property is not subject_to a substantial_risk_of_forfeiture sec_1_83-3 income_tax regs property is not considered to be transferable merely because the person performing the services may designate a beneficiary to receive the property in the event of his or her death sec_1_83-3 income_tax regs a substantial_risk_of_forfeiture exists where the right to property is conditioned on the future performance of substantial services or the occurrence of a condition related to a purpose of the transfer and the possibility of the forfeiture is substantial if such condition is not satisfied sec_83 sec_1_83-3 income_tax regs forfeiture of property upon termination of employment before retirement at a specified age or time death or disability generally constitutes a substantial_risk_of_forfeiture sec_1_83-3 example income_tax regs under the terms of the agreement mr lay would forfeit the annuity_contracts upon termination of his employment before the end of the 25-year service period unless his employment was terminated because of a retirement with the consent of the board b disability c an involuntary termination other than termination for cause or d a termination for good reason meaning a substantial change in mr lay’s duties or position with enron or a substantial decrease in his salary without his consent forfeiture of the annuity_contracts if mr lay voluntarily terminated his employment before the dollar_figure years constitutes a substantial_risk_of_forfeiture see id the board would have had to take a specific action to trigger mr lay’s right to the annuity_contracts upon other terminations by consenting to mr lay’s retirement or by substantially decreasing mr lay’s salary or position without his consent the requirement for the board to take an action to trigger mr lay’s right to the annuity_contracts is consistent with a substantial_risk_of_forfeiture because mr lay had to work dollar_figure years for enron in order to receive the annuity_contracts and could terminate his employment before those dollar_figure years only under specific circumstances outside his control without forfeiting the annuity_contracts there was a substantial_risk_of_forfeiture in the events in regarding mr lay’s resignation are not before us in conclusion sec_83 does not apply to the deferred_compensation arrangement at issue iv price of annuity_contracts respondent’s second alternative position is that the dollar_figure million purchase_price enron paid for the annuity_contracts was in excess of their fair_market_value as of date and that the excess represented additional compensation to mr lay this court has considered whether an amount_paid by an employer to an employee for property was actually in part a payment for property and in part compensation in 94_tc_455 affd 931_f2d_314 5th cir an employer purchased the personal_residence of an employee pursuant to an employment contract for a price equal to the residence’s appraised fair_market_value of dollar_figure the employer immediately attempted to resell the house and sold the house years later for dollar_figure at a loss of dollar_figure on the transaction as its initial argument the employer claimed an ordinary and necessary business_expense in an amount equal to the loss on the theory that this amount represented compensation deductible under sec_162 id pincite this court rejected this argument stating there is nothing in the record before us to indicate that any portion of the purchase money the employer paid to the employee represented a premium or additional_amount in excess of the fair_market_value of the house that would otherwise constitute compensation id similarly there is nothing in the record to indicate that any portion of the dollar_figure million that enron paid the lays for the annuity_contracts represented a premium or additional_amount in excess of the fair_market_value of the annuity_contracts that would otherwise constitute compensation as in azar nut co enron relied upon a valuation report that indicated that the value of the annuity_contracts was dollar_figure million at the time of the transaction the compensation committee was aware that the lays had paid dollar_figure million for the annuity_contracts less than years before the compensation committee began its deliberation in addition we note that whereas in azar nut co the employer suffered a loss with respect to the asset that it purchased there is no indication that enron suffered any loss with respect to its purchase of the annuity_contracts the income base of the kenneth l lay annuity_contract on date was dollar_figure when enron paid dollar_figure million for that contract and the owner of the kenneth l lay annuity on date was entitled to annuitize the guaranteed income base of dollar_figure pursuant to the terms of the kenneth l lay annuity the commissioner has argued in other cases that sales were in fact dividend distributions after concluding that the sale prices exceeded the fair_market_value of the assets sold e g 380_us_563 302_us_63 in these cases the court looked to the intent of the contracting parties to pay a fair_market_value price for the assets see also revrul_67_246 1967_2_cb_104 donor must prove that purchase_price exceeded value of property purchased intention to make a gift by paying in excess of value highly relevant to determining whether donor made gift in commissioner v brown supra shareholders sold their stock to a third-party buyer for dollar_figure million and the purchase_price was payable by the buyer over time from the corporate earnings the commissioner argued that the purchase_price was excessive and therefore was a device by the sellers to collect future earnings_of the corporation at capital_gains rates this court had found that the sale price was arrived at in an arm’s- length transaction was the result of real negotiating and was within a reasonable range in light of the earnings history of the corporation and the adjusted net_worth of the corporate assets 37_tc_461 affd 325_f2d_313 9th cir affd 380_us_563 even though the sellers did not receive the full purchase_price this court held that the transaction was a sale partly on the basis of the finding that the purchase_price was within a reasonable range in this case as in brown there has been no showing that the transaction’s purpose was other than a sale ie to pay compensation to mr lay the board_of directors of enron wished for mr lay to return to enron as ceo in order to persuade mr lay to return as ceo the compensation committee asked the compensation consultant towers perrin for proposals and selected the proposal that satisfied the requirements of the board_of directors towers perrin proposed that enron purchase the annuity_contracts for dollar_figure million and provided analyses to the compensation committee showing that the value of the annuity_contracts was dollar_figure million with this information the compensation committee concluded that the value of the annuity_contracts was dollar_figure million the compensation committee concluded that the purchase of the annuity_contracts was a good investment for enron in addition the parties to the agreement specifically agreed that enron was paying dollar_figure million for each annuity_contract the record demonstrates that enron intended to pay dollar_figure million as fair_market_value for the annuity_contracts and there is no excess to include in gross_income intent of the parties is important in determining whether a purchase_price should be recharacterized enron’s compensation committee approved the purchase of the annuity_contracts for dollar_figure million accordingly the board approved a purchase_price of dollar_figure million for an asset valued at dollar_figure million the lays had paid dollar_figure million for the annuity_contracts and even though the towers perrin report indicated a value of dollar_figure million they would have received only dollar_figure1 million if they had liquidated the annuity_contracts at that time nevertheless the compensation committee reasonably found that dollar_figure million was a fair price for the annuity_contracts the issue is not whether the value of the annuity_contracts was in fact dollar_figure million the issue is whether the dollar_figure million that enron paid to the lays was intended for the purchase of the annuity_contracts in determining whether the annuities transaction was in fact a sale the court considers whether the 7see irs publication for purposes of determining a charitable_contribution_deduction the value of an annuity_contract or a life_insurance_policy issued by a company regularly engaged in the sale of such contracts or policies is the amount that company would charge for a comparable contract for gift_tax purposes therefore it appears that the value of the annuity_contracts would have been dollar_figure million 376_f2d_402 5th cir 80_tc_872 the valuation test for estate and gift_tax purposes is generally the same as that used for charitable_contribution_deduction purposes affd 757_f2d_1208 11th cir purchase_price was within a reasonable range see commissioner v brown u s pincite in order to demonstrate that the purchase_price was in fact within a reasonable range petitioners introduced expert witness testimony of the value of the annuity_contracts on the sale date date when the income base was dollar_figure for the kenneth l lay annuity and dollar_figure for the linda p lay annuity petitioners’ expert witness lawrence katzenstein prepared a report with an appraisal of the annuity_contracts at the time of the annuities transaction mr katzenstein has special expertise in valuing annuity_contracts mr katzenstein used a discount rate provided by petitioners’ other expert witness robert buchanan an experienced appraiser and accredited senior appraiser business valuation in order to determine the discount rate to use to value the annuity_contracts mr buchanan used evidence of open market transactions in interests similar to the annuity_contracts mr buchanan noted that the discount rate would be used to calculate the value of the annuity_contracts as the present_value of the future stream of guaranteed payments based on the guaranteed income rider mr buchanan based the discount rate on two methodologies the first method was based on the actuarial guideline for variable annuities from the national association of insurance commissioners for purchasing an annuity with a guaranteed minimum income benefit and produced a discount rate of dollar_figure percent as of date the second method was based on the standard valuation law from the national association of insurance commissioners for the standard valuation interest rates for types of annuities such as the annuity_contracts and resulted in a discount rate of dollar_figure percent mr buchanan weighted all indications equally and concluded that the appropriate discount rate applicable to the valuation analysis of the annuity_contracts as of date was dollar_figure percent mr katzenstein then used this fair market_discount rate to determine the fair_market_value of each of the annuity_contracts on date mr katzenstein used the information provided by john hancock regarding the monthly annuity benefits payable starting on the first date the annuity option could have been exercised pursuant to each of the annuity_contracts in order to calculate the values of the annuity_contracts mr katzenstein then performed an actuarial analysis to determine the value of each of the annuity_contracts using the discount rate provided by mr buchanan mr katzenstein determined that the minimum value of the kenneth l lay annuity was dollar_figure and that the minimum value of the linda p lay 8mr katzenstein reviewed the annuity_contracts and took note of both the guaranteed minimum income benefit payable on amounts paid for the contract and the special feature that if the annuity investment account performed sufficiently well the payments could be higher annuity was dollar_figure as of date totaling dollar_figure mr katzenstein testified that these values were minimum values and that the annuity_contracts could have had higher values as of date the purchase_price in this case therefore was within percent of the values that mr katzenstein calculated as the minimum values of the annuity_contracts that purchase_price was within a reasonable range of values supports the conclusion that the annuities transaction was in fact a sale in other words even if the dollar_figure million price for the annuity_contracts exceeded the actual values somewhat the price was within a reasonable range of values showing that the parties intended for the annuities transaction to be a sale transaction for the annuity_contracts respondent offered no evidence with respect to the values of the annuity_contracts as of date moreover in the event that the sale price is treated as less than dollar_figure million with the excess treated as taxable this excess_amount also would be a loss to the lays mr lay and mrs lay paid a total of dollar_figure million for the annuity_contracts and their cost_basis in the annuity_contracts is dollar_figure million accordingly if the lays had sold the annuity_contracts for less than dollar_figure million then they might have reasonably reported an ordinary_loss on the sale equal to the amount_realized less their adjusted_basis see sec_1001 revrul_61_201 1961_2_cb_46 ordinary_loss allowed on a taxpayer’s surrender of a single premium refund annuity_contract for cash consideration in summary enron paid mr and mrs lay dollar_figure million in exchange for the annuity_contracts enron intended for the full amount of its payment to be consideration for the annuity_contracts the annuities transaction is well documented and all actions of the parties to the transaction reflect that enron purchased the annuity_contracts for dollar_figure million the lays properly reported the transaction on their tax_return as a sale of their annuity_contracts to reflect the foregoing decision will be entered for petitioners