Court Opinion

ID: 9641495
Source: CourtListenerOpinion
Date Created: 2023-08-22 17:33:10.626325+00
Date Added: 2024-06-11T18:10:37.830621
License: Public Domain

O’CONNELL, Circuit Judge
(dissenting).
I agree with my brethren that the record before us offers little to support the assertion that decedent* engaged in “ordinary arm’s length business transactions” when she transferred to her children and' their respective spouses the 1,120 shares of stock in return for their unsecured promises to pay her $24,672 per annum. The considerable doubt I have concerning the purported nature of the transactions dictates to me the appropriate action to be taken by this court on the tax liability of decedent on those shares of stock.
Decedent was 77^4 years of age at the time. Each of her eight children received 'an identical number of shares of the stock, and each made an unsecured promise to pay her $3,084 per annum. The stock was in a company over which her family had the controlling interest. The executed instruments themselves disclose that retention of family control over the company was an integral element in the transactions. That the value of the shares which she transferred was greater than that necessary to purchase the so-called annuity of $24,672 per annum is demonstrated by the fact that, the same year, she paid a gift tax on what was computed to be the $22,733.89 difference in value between the 1,120 shares of stock and what (according to the American Annuitanee Mortality Table) was the total consideration necessary to derive annual installments of $24,672. *360There is -still another indication -of how-decedent viewed the transactions: despite the provisions of Section 22(h) (2) of the Internal Revenue Code, calling for inclusion each year of 3% of 'the aggregate premiums paid for an annuity, decedent made no such inclusions in her tax returns after the-se tran-sa-ctions w-e-re consummated.
Perhaps an explanation, -credible an-d consistent, with an -annuity motive, could be offered to show why .the same arrangement was made with -all eight -children, and why no -security was required of them; but the -combination of all the circumstances outlined “above, particularly the payment of a -gift tax on what was reputed to be -a “sale”, seems to me to lead to no -conclusion other than that an -aged woman made what -she believed to be an inter vi-vos -disposition, substitutional of -a testamentary one, of, that part of 'her estate represented by the shares -of stock. The facts -are to me consonant only with -the inference that, for federal tax purposes, what decedent really did was to -create eight trusts, in each of which she made -herself life beneficiary to the extent of $3,084 per annum.
That -decedent and -her -children -chose to designate the agreements as private annuity -contracts -can and should -be no obstacle to -an inquiry into -the -real nature oi£ the transactions here involved. Indeed, decedent herself recognized the -apparent absence o-f a bona -fi-de sale when ¡she accepted the Co-m-missi-oner’s valuation and paid the gift tax.
Consequently, as I analyze this -case, neithor Section 22(b) (2) nor Section 111 of the Internal Revenue -Code -is properly applicable, there being no sale or -capital gain involved. In practical effect, decedent seems to -me -to have done no more than pass legal titl-e to 1,120 shares, in return for a reserved life estate as to $24,672 per annum of the income -therefrom, and a power to -invade the -corpus, if necessary, to supplement the income if -less than $24,672 per annum. On principles not -unlike those -enunciated in Commissioner of Internal Revenue v. Tower, 1946, 327 U. S. 280, 66 S.Ct. 532, 90 L.Ed. 670, 164 A.L.R. 1135, and Lusthaus v. Commissioner, 1946, 327 U.S. 293, 66 S.Ct. 539, 90 L.Ed. 679, the Commissioner -and the Tax -Court should -have pierced -the window-dressing and determined whether the income from the 1120 shares was taxable to decedent under the provisions of Section 22(a) of the Internal Revenue Code, as long -as she -remained -alive, the -shares being part of her -estate at her -death. Cf. Commissioner of Internal Revenue v. Church’s Estate, 335 U.S. 632, 69 S.Ct. 322, 337.
Under the view I take, questions o-f “fair market value” are immaterial at this -stage of the proceedings. I would vacate the ■decision of the Tax Court and remand the -cause -for a determination of tax liability on the annual receipt -of $24,672 by the decedent.