Court Opinion

ID: 4479704
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:13:49.018928+00
Date Added: 2024-06-11T15:03:32.938312
License: Public Domain

KeRN, J., dissenting: By the contract of March 7, 1929, embodied in the letter of Nicholas Brady to Freeman, petitioners were entitled to the payment of $12,000 a year during the life of Freeman, and of $8,000 a year during the life of Mrs. Freeman if she should survive her husband. This was more than “a prospect of receiving $12,000 a year”; it was a contractual right against a solvent obligor, and can only be described as a right to an annuity. Whether that annuity was a retirement annuity or an annuity given to Freeman as compensation is immaterial, since the tax year before us is 1989 and not 1929. The question in this proceeding is not whether petitioners were subject to tax upon the receipt of this right in 1929, but whether they are subject to tax upon the receipt in 1939 of two annuity contracts and an amount of cash taken by them in compromise of the rights under the 1929 contract. It is also immaterial that this right of Freeman under the 1929 contract might have been conditional in 1929 or 1930 upon his rendering services to Brady as a consulting accountant upon Brady’s request. This condition was removed by Brady’s death in 1930. The important fact is that in 1930, at the death of Brady, Freeman had a valid unconditional right to an annuity for himself and his wife as against Brady’s estate. He filed a claim based thereon against the estate and its validity was acknowledged by the executrix and a deduction on account thereof was allowed to the estate by respondent in computing estate taxes due. This deduction was in the sum of $112,513.20. Payments were made to Freeman for many years by Brady’s estate. In 1938 a successor executor was appointed for Brady’s estate. He pointed out to the Surrogate’s Court that the estate could not be closed until the death of the survivor of petitioners unless some settlement could be made with petitioners for their rights under the annuity contract made by Nicholas Brady. If an insurance company were to be substituted as the obligor under the annuity contract held by petitioners the cost to the executor, as pointed out by it in its petition to the court, would be approximately $142,700. The executor, faced with that situation, decided to stop making the payments to petitioners called for under its decedent’s annuity contract and to dicker with petitioners with regard to a settlement of their claims under that contract. The executor dickered successfully from the standpoint of the estate. Instead of having to purchase substitute annuity contracts from an insurance company at a cost of $142,700, the executor was able to persuade petitioners to give up their rights under the 1929 annuity contract executed by Brady, which, according to the executor’s petition to the court, had a value in 1939 of $130,070, and to accept in return for the relinquishment of those rights two annuity policies issued by an insurance company at a cost to the executor of $71,339.20, plus $8,660.80 in cash, the latter sum being a little in excess of the unpaid monthly installments due under the 1929 contract up to the date of settlement. The net result of the transaction from the standpoint of the executor was that it could close the estate of its decedent and at a cost of $80,000 instead of $130,070; while from the standpoint of the petitioners they had given up an annuity calling for the payment during their joint lives of $12,000 a year and during the life of the survivor of $8,000 a year, and now had, instead of such an annuity payable by an estate having net assets of approximately $1,800,000, annuity contracts executed by an insurance company, one calling for the payment of $3,610.32 a year during their joint lives and thereafter to the survivor and the other calling for the payment during the life of William E. Freeman of $2,402.04 a year. In addition they received in cash $8,660.80. It requires no reference to actuarial tables to conclude that the value of the annuities received by petitioners in 1939 was far less than the value of the annuity to which they were entitled under the Brady contract of 1929. However, if one does refer to the actuarial table set out in Regulations 105, p. 31, this conclusion may be verified. The difference in value is considerably greater than the $8,660.80 received by petitioners in cash. It is to these facts that the majority opinion applies the doctrine of Richard R. Deupree, 1 T. C. 113, and Renton K. Brodie, 1 T. C. 275. As we pointed out in the Brodie case, the taxpayer in the Deupree case was “in the position to go to the company and say: ‘You have some money which, under the special remuneration plan adopted, I am entitled to receive in cash. However, I would prefer to have * * * that cash invested in an annuity contract.’ ” In the instant case Freeman was not entitled to receive $80,000 in cash as special remuneration for his services during the taxable year. He was entitled to annual payments of $12,000 for life which had no reference to services performed during the taxable year but constituted an annuity given to him 10 years before as a retirement pension or as compensation for services ended in 1930, or, perhaps, as both pension and compensation for work performed long prior to the taxable year. The fact that Freeman was offered in compromise for this right the sum of $80,000, which offer was refused, can not support a conclusion that he constructively received this amount. Freeman wanted annual payments and was entitled to receive annual payments. A rejected offer to compromise his rights to annual payments by the payment of one lump sum can not make him taxable on the lump sum by any doctrine of constructive receipt. The Brodie case was one in which the annuity was purchased as extra compensation for the employee’s services rendered during the taxable year there involved, and was “intended as extra compensation for services performed in the taxable year,” as we pointed out in Charles L. Jones, 2 T. C. 924, 931. In the latter case we reviewed the administrative rulings with regard to the taxation of annuities and the plain inference of that case is that the rule of the Brodie case will be applied only to cases having the same unusual facts, since, in the ordinary case, the administrative rulings have already set up equitable and fair methods for taxing annuities. Nevertheless, the majority opinion extends the rule of the Brodie case to the instant proceeding in which an annuity was not purchased as extra compensation for the employee’s services rendered during the taxable year and was not intended as extra compensation for such services, but was purchased as part of a compromise of previously existing rights to an annuity. The practical results of the majority opinion are startling. Petitioners were entitled during the taxable year to receive $12,000 annually for the life of Freeman. They took in compromise of this right $8,660.80 in cash and two annuity contracts calling for the payment of $6,012.36 a year for the life of Freeman. These annuity contracts had no cash surrender or loan value. If the compromise transaction had occurred in 1945 instead of 1939, the tax upon petitioners would have been in excess of $50,000. This tax of $50,000 would have been the result of a transaction by which petitioners had given up more than they received and by which petitioners had received in cash only $8,660 plus two annuity contracts which they could not sell and against which they could not borrow. It is an understatement to say that such a result is unfortunate. Since it is also contrary to the system for the taxation of annuities set up by administrative regulations and rulings, and is not required by any of the decided cases, I respectfully dissent from the majority opinion. Arundell and Leech, //., agree with this dissent.