Court Opinion

ID: 4474878
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:11:10.968525+00
Date Added: 2024-06-11T14:53:52.774561
License: Public Domain

Turner, J., dissenting: I find myself unable to agree with the conclusions of the Court in its disposition of the Lydia Hopkins case. First, it is concluded that the annual payments provided by the petitioner’s mother, in settlement of the petitioner’s claims as an heir of her father, were not in the nature of a bequest or devise of income or the income of property received by bequest or devise, within the meaning of section 22 (b) (3) of the Internal Revenue Code, and in reaching that conclusion, it is said that Lyeth v. Hoey, 305 U. S. 188; Harrison v. Commissioner, 119 Fed. (2d) 963; and Quigley v. Commissioner, 143 Fed. (2d) 27, are distinguishable. Next, it is said that the annual payments to be received by the petitioner during her lifetime pursuant to the contract with the mother were not annuity payments within the meaning of section 22 (b) (2) (A) of the code. While I do not find the reasoning as to nonapplicability of section 22 (b) (3) too convincing, my chief concern is over the interpretation of the second sentence of section 22 (b) (2) (A) and the reasoning by which it is concluded that that provision is not applicable to the annual payments to be received by the petitioner during her lifetime under the agreement with her mother. In other words, assuming the soundness of the opinion as to section 22 (b) (3), the applicability of the second sentence of section 22 (b) (2) (A) seems to me to be perfectly clear, and, further, the factual conclusions that the transaction between Lydia and her mother was an arm’s length transaction and that Lydia’s claim or rights, as the heir of her father, had a fair market value of $254,000, not only do not support the conclusion reached, but tend to refute and contradict it. As for the contract itself, there can be no question that it was in fact an annuity contract. There is no claim that it was not valid and binding. It was not for a fixed sum, but called for payments of specified amounts so long as Lydia should live and, as in the case of a recognized “annuity contract” with a “reputable insurance company,” the ultimate amount to be paid to Lydia was dependent solely upon the length of her life. Furthermore, the consideration which she paid for the contract was found to have been the “present value” of the total of the annual payments she was to receive, computed on the basis of her life expectancy. In other words, on the basis of that finding of value, the consideration paid for the contract is certainly within reasonable range of what she might have been required to pay for an admitted “annuity contract” by a company regularly engaged in the business of writing such contracts. Just what the decisive factors were in reaching the conclusion that the payments in question are not annuity payments and, therefore, not within section 22 (b) (2) (A), are not very clear. A number of cases are cited in support of the conclusion that the contract here was not an annuity contract within the meaning of the statute, but, interestingly enough, none of them have to do with the question whether, under the statute, any part of the payments received constituted taxable income to the recipient under the statute here to be construed and applied, or under any other provision of the Internal Revenue Code. As a matter of fact, with the exception of Citizens National Bank v. Commissioner, 122 Fed. (2d) 1011, the cases cited and relied upon have to do with the taxable years where, under the statute as it then stood, the recipient of annuity payments would not have been taxable on any part of the amounts received until after there had been full recoupment of the consideration paid, regardless of the determination of whether, as to the payor, the payments were in part interest, purchase price of property, or of a character which would or would not give him the right to a statutory deduction. It is too well settled to require the citation of cases that deductions for the purpose of determining net income are matters of legislative grace, and a taxpayer claiming a deduction must bring his case strictly within the provision of the statute if the deduction is to be allowed, whereas, to the contrary, it is also equally well established that Congress has given to its definition of gross income the broadest possible sweep. As to Citizens National Bank v. Commissioner, supra, which, it would seem, is one of the two cases most strongly relied on for the conclusion reached herein as to the nonapplicability of the second sentence of section 22 (b) (2) (A), it is interesting to note that the payments were not even controlled by the life expectancy of the transferor. In that case, a man by the name of Baird had conveyed property, including a building, to the bank, in consideration for the payment to him of $200 per month during his lifetime, contingent, however, upon Baird’s agreement to keep the roof of the building in repair and his giving the bank the right to make other repairs. It was further provided that in the event the building transferred, and for which the payments were to be made, should be destroyed or become untenantable, the parties were then to stand “in the same relation to each other as if this agreement had never been made.” Certainly, in a case of that kind, whatever discussion the court may have indulged in with respect to the nature and character of “annuity contracts” or “annuity payments,” the decision on the deductibility by the bank of the annual payments •would have little force or effect in determining the issue in the instant case. After consideration of the cases referred to and which, as noted, in no way involve the provision of the statute here under consideration, the majority opinion states what appears to be its controlling reason for the conclusion reached, which is, that here the consideration for the payments for life was “the transfer of possible equitable rights'' and such consideration is not adequate to support an “annuity contract” within the meaning of section 22 (b) (2) (A), whereas a contract would be an “annuity contract,” and the payments thereunder “annuities,” within the meaning of the statute, if “property, title to which is held by the transferor, is conveyed in consideration of the transferee’s agreement to make periodic installment payments to the trans-feror for his life.” From the language used, it would seem that the feeling is that because the consideration at the time of the transaction was in the nature of a claim by Lydia Hopkins, as her father’s heir, rather than specific identifiable items of property, “title to which” was in Lydia Hopkins, the consideration is not adequate or sufficient to support an annuity contract, and this, even though the transaction was at arm’s length and at the time thereof the consideration was sufficient in substance to support an agreement to pay $24,000 per year to Lydia Hopkins so long as she should live and even though, according to the findings of fact, the claim of Lydia Hopkins, as the heir of her father, had a fair market value of $254,000. It is to me strange reasoning which would justify the conclusion that the claim of Lydia Hopkins as the heir of her father was ample and sufficient in substance to support an arm’s length sale,1 as the report holds, for a consideration found to have had a then present value of $254,000, and still be inadequate to support an annuity contract. The contention that her rights constituted merely “possible equitable rights” which were so nebulous or illusive as to be incapable of supporting an annuity contract for payments equal to the amounts which Lydia was able to contract for in an arm’s length transaction with her mother, is, in my opinion, not only contradicted by the factual conclusion that those rights had a fair market value of $254,000, but such a contention also fails to give even reasonable regard to the substance of the “rights of heirship” as expressed by the Supreme Court in Lyeth v. Hoey, supra. What would have been the answer of the majority, for instance, if the contract, likewise in an arm’s length transaction, had been with a company regularly engaged in writing annuity or endowment contracts ? Under the general scheme of the statute, a taxpayer in a taxable transaction is normally permitted to recover his cost before being required to report as income any part of payments received. But in the case of amounts received as annuities under annuity or endowment contracts, Congress has seen fit to legislate specifically and to require the reporting as income of so much of each annual payment as is not in excess of 3 per cent of the aggregate premiums or consideration, leaving any excess to be treated as recovery of costs. It appears that in so legislating, Congress recognized that as a general proposition there is an element of profit to the recipient in such deferred and periodic payments and decided, as it had previously done with respect to installment sales of property, that the reporting of such profit should be spread over the life of the payments, as against the prior method of applying all payments as a return of cost until the full amount of cost has been recovered, and of thereafter reporting the entire sums received as income. In so providing, Congress has, of course, adopted an arbitrary formula, in that it is inescapable that the profit ultimately realized is, in some instances, greater than the 3 per cent of the consideration and, in some instances, less than 3 per cent, and it is further inescapable that the only way in which the recognition of gain and the amount thereof can be determined with certainty is by the previous treatment, namely, by considering all payments as a return of capital until the full amount of consideration paid has been returned. In so legislating, however, Congress fixed the amount to be reported at 3 per cent of the aggregate premiums or consideration paid, because, as a general proposition, that return fairly approximated the profit involved. Because of its arbitrary character, however, the constitutionality of the present provision has been attacked, but in all such cases the statute has been declared to be constitutional, Manne v. Commissioner, 155 Fed. (2d) 304; Egtvedt v. United States, 112 Ct. Cls. 80; Florence M. Shelley, 10 T. C. 44; Estate of Mary A. Bedford, 40 B. T. A. 475; Anna L. Raymond, 40 B. T. A. 244; affd., 114 Fed. (2d) 140; F. A. Gillespie, 38 B. T. A. 673. In such situation, therefore, it is my view that the statute, as Congress has written it, should be accepted and applied in this case, as in other cases, and that, for the purpose of computing the profit for Lydia Hopkins and fixing the year or years in which such profit should be accounted for, we should not strain to reach a conclusion the effect of which is to restore a method of computing and reporting income which Congress deliberately and pointedly saw fit to discard when it first enacted the present provision in the Revenue Act of 1934. I accordingly note my dissent. Hill and Disney, JJ., agree with this dissent.   For a case In which a sale of securities was recognized, but in which it was held that such part of the selling price as was paid as annuities was subject to the 3 per cent provision of section 22 (b) (2) (A), see Hill’s Estate v. Maloney, 58 Fed. Supp. 164.