Opinion
Docket No. 111443.
1943-10-25
CHARLES L. JONES AND ERSIE C. JONES, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
George R. Sherriff, Esq., and Albert S. Rockwood, Esq., for the petitioners. James C. Maddox, Esq., for the respondent.
1. Petitioner, a retired employee of an oil company, received substantial sums annually under a retirement contract, which had been purchased by his employer from an insurance company and fully paid for by the employer. The cost of the contract had not been included (or includible) in petitioner's gross income in the year purchased or in the year when his rights under it had become vested. Held that the amounts received each year must be included in gross income and no portion thereof may be excluded under section 22(b)(2), I.R.C.
2. Prior to the taxable years petitioner, in the manner prescribed by the retirement contract, elected to receive less than the amount payable under it to the end that payment to his wife be made after his death in the event he predecease her. The Commissioner makes claim for an increased deficiency for each year, seeking to include in petitioner's gross income not only the amount actually received by him but also the difference between that amount and the sum which would have been payable to him if the election had not been made. Held the claim for an increased deficiency may not be allowed. George R. Sherriff, Esq., and Albert S. Rockwood, Esq., for the petitioners. James C. Maddox, Esq., for the respondent.
This proceeding involves deficiencies in income tax for the years 1939 and 1940 in the respective amounts of $20,558.02. Two issues are raised by the respondent in an amended answer in which he seeks increased deficiencies. Stated generally, the first question is whether a retired employee is required to include in his gross income the amount received by him as ‘retirement payments‘ under a contract with an insurance company, the contract having been purchased and paid for wholly by his employer, or whether the amount to be included in his gross income is 3 percent of the aggregate premiums or consideration paid by the employer for the contract. The second, somewhat related to and contingent upon the conclusion reached under the first, is whether the employee must include in his gross income not only the amount actually received but the amount which he would have received annually if he had not elected to take a lesser amount to the end that his wife should be paid a sum annually for the remainder of her life after his death.
FINDINGS OF FACT.
Petitioners are husband and wife, residing at 300 Park Avenue, New York, New York. They filed joint returns of income for the years 1939 and 1940 with the collector of internal revenue for the second district of New York. The present controversy involves only amounts paid to, or contract rights of Charles L. Jones; so he will hereinafter be referred to as the petitioner.
Petitioner entered the employ of Atlantic Refining Co., a subsidiary of the Standard Oil Co., in 1891. About ten years later he was employed by the Vacuum Oil Co., a wholly owned subsidiary of the Standard Oil Co., and remained with that company until 1931. Vacuum merged with Standard Oil Co. of New York in 1931 and the latter changed its name, first to Socony Vacuum Corporation and later to Socony Vacuum Oil Co. Petitioner continued in the employ of the various companies until he retired in 1937. At that time he was a vice president, receiving a salary of $55,000 a year. The companies will hereinafter be referred to as ‘employer.‘
Early in 1931 employer entered into a ‘group contract‘ with the Metropolitan Life Insurance Co., hereinafter referred to as ‘insurer.‘ The date of issue of the contract is stated to ‘be deemed the first day of January, 1931.‘ The contract, together with the amendments thereto and the endorsements thereon, is included herein by reference.
Certificates were issued to the employees, reciting the benefit to which they were entitled. The certificates and the benefits provided thereunder were not assignable.
The purpose of this reference is to enable the parties to bring before the Circuit Court of Appeals such portion of petitioner's Exhibit 6 as may be necessary or proper. It consists of more than 100 pages. We have endeavored to incorporate in our findings the substance of the provisions especially pertinent to the issues to be determined.
The contract between employer and insurer required specified payments to be made by each— by employer to insurer for ‘service annuities‘ to its (employer's) employees and by insurer to the employees. The general purpose of the contract was to provide a ‘retirement annuity‘ for each employee, based on service in the employ of employer. For services performed prior to January 1, 1931, the full cost of the annuity, at the established rates, depending on the age and sex of the employee, was payable by employer. payment of this sum was not required before the employee's retirement unless an option should be exercised by him which placed insurer under an obligation to make payment to him or his dependents. After January 1, 1931, contributions of employees, deducted from their pay, supplemented the amounts which were to be paid by employer.
The maximum annual rate of retirement annuity
under the contract as originally written was 75 percent of the employee's annual rate of pay during the last year of his employment prior to retirement from active service. By amendment effective January 1, 1934, he could receive 75 percent of a five-year average, if greater than the last year's pay; but if he had become eligible to retire at the completion of 40 years of domestic or 30 years of foreign service the date when he first became so eligible was to be considered the normal retirement date in determining the maximum to be received. The words ‘normal retirement date‘ were stated to mean the date on which the annuity payable should normally commence, which, as applicable to petitioner, was the certificate anniversary nearest his 65th birthday. By amendment effective January 1, 1934, an optional retirement date, viz., the completion of 40 years of continuous service, entitled an employee to the retirement annuity payments prior to the normal retirement date if written request therefor were made by him.
Retirement annuity, service annuity, normal retirement date, optional retirement date, stipulated payments, premiums, domestic and foreign service, and other terms used in the contract are defined at length therein. We shall explain them briefly in our findings, confining our explanation, however, to their applicability to petitioner. See footnote 1, supra.
The contract contained several provisions with reference to the payments to be made by the employer and the employee. The employer was obligated to purchase, by one payment, on or before the employee's retirement, a ‘service annuity‘ for services performed prior to January 1, 1931, equal to 2 percent of the employee's last annual rate of pay times the number of years of continuous service but subject to the 75 percent maximum referred to above. Other stipulated payments were to be made by the employer which were to be the aggregate of the income stipulated payments as determined by a formula in the contract for the employees covered under it. The employer might, at any time, discontinue the payment of the stipulated payments and premiums, in which event the coverage under the contract was to cease. Such discontinuance, however, was not to be effective retroactively nor would it affect the amount or terms of any retirement annuity already purchased on account of service completed prior to such discontinuance.
Petitioner completed forty years continuous service in 1931. On July 1, 1932, employer delivered to him a certificate issued in his name certifying his rights under the contract. At that time he had not yet reached the retirement age of 65. He became 65 years of age in 1934 and became entitled under the contract to a life annuity of $41,250. The contract contained a provision under which he might, if he elected to do so, receive a life annuity of a reduced amount and have the annuity continue after his death to a designated dependent. Some time between January 1, 1934, and May 1, 1934, petitioner elected to receive a life annuity of $33,000 and an annuity of $24,882.53 for his wife for her life provided she survived him.
The contract established a basis of calculation based upon the ages of Jones and his wife under which, as an alternative, a joint life annuity equivalent to .751 of each $1 of single life annuity could be provided. The mechanics of working out payment to Jones of 80 percent of $41,250 for his life, which he indicated he desired to have, seems to have been as follows: $33,132.53 was converted to a joint and survivorship annuity of $24,882.53. The remainder, or $8,117.47, was left as a single life annuity. The net result was that Jones will receive $33,000 annually for the remainder of his life and his wife will receive $24,882.53 for the remainder of her life after his death in the event that she shall survive him.
Petitioner had contributed his share of the payments under the annuity contract up to 1934; however, because of his 40 years service, which at 2 percent per year would provide a past service annuity of more than the 75 percent maximum prescribed by the contract, his contributions were refunded to him.
The amounts paid by employer to the insurance company to provide for petitioner's retirement annuities were as follows:
+-------------------------+ ¦Dec. 31, 1932 ¦$2,177.20 ¦ +--------------+----------¦ ¦Dec. 31, 1933 ¦4,257.00 ¦ +--------------+----------¦ ¦Jan. 1934 ¦12,162.64 ¦ +--------------+----------¦ ¦July 1, 1934 ¦522,995.38¦ +--------------+----------¦ ¦Total ¦541,592.22¦ +-------------------------+
The first two payments shown above represented the stipulated payments made by employer under the formula prior to the amendment effective January 1, 1934, which provided for retirement on the basis of continuous service regardless of age. The payment of January 1934 was required to provide for maturity of the retirement annuities as of January 1, 1934. The payment of July 1, 1934, was required because petitioner elected to provide an annuity for his wife out of his retirement annuity, and, he having had 40 years continuous service, the insurance company then became obligated to commence payments to his wife upon his death in the event that she should survive him. If such election had not been made payment would not have been required until he actually retired.
Between the date when petitioner became entitled to retire in 1934 and the date of his actual retirement in 1937 insurer refunded to employer amounts aggregating $88,460.48. This amount represented stipulated payments made by employer covering the period petitioner remained in its service after he became entitled to retire, during which annuity payments would have been payable to him if he had retired in 1934. The total net premiums or consideration paid for the contract under which the annuities for petitioner and his wife became payable was therefore $453,131.74, all of which was paid by employer.
The difference between a single life annuity of $41,250 payable to petitioner during his life and the annuity of $33,000, or $8,250, if paid to the insured annually during his life, would have created a fund sufficient to provide for an annuity for his wife upon his death if she survived him in the amount of $24,882.53.
Beginning January 1, 1937, and continuing thereafter through the taxable years, the petitioner received annuity or retirement payments from the insurer at the rate of $33,000 per year. In his returns for the years 1937 and 1938 he included the amounts so received in his gross income and paid the tax thereon. On March 15, 1941, he filed claims for refund of the tax paid for the years 1937 and 1938, claiming that no part of the payments received from insurer was taxable. The claims for refund were rejected.
Petitioner never reported the value of his retirement annuity contract as income in any income tax return filed by him. In his income tax returns for the taxable years petitioner reported in schedule I, as nontaxable income, the receipt of $33,000 as an annuity under the group contract. No part of the amount, however, was included in his gross income for either year.
The respondent in determining the deficiencies in tax included the $33,000 in petitioner's gross income and made other adjustments not presently in issue. In an amended answer he claims that he is entitled to an increased deficiency in tax, averring that he should have included in gross income for each year $41,250, rather than $33,000.
OPINION.
MELLOTT, Judge:
Petitioner concedes that he erroneously reported amounts received as nontaxable income.
He argues, however, that they should not be included in gross income, but should be taxed as annuities under section 22(b)(2), I.R.C.
Upon brief it is stated: ‘Petitioners admit that 3% of the total premiums paid is taxable in each of the years 1939 and 1940.‘
The first question, therefore, as indicated at the outset, is: Where an employer purchases and pays for a contract under which a retired employee is paid an annuity, shall the employee include in his gross income the entire amount received, or may he be permitted to exclude from gross income the excess of the amount received in the taxable year over an amount equal to 3 per centum of the aggregate premium or consideration paid by the employer for such annuity until the aggregate amount so excluded from gross income equals the aggregate premiums or consideration paid by the employer for the annuity?
ANNUITIES, ETC.— Amounts received (other than amounts paid by reason of the death of the insured and interest payments on such amounts and other than amounts received as annuities) under a life insurance or endowment contract, but if such amounts (when added to amounts received before the taxable year under such contract) exceed the aggregate premiums or consideration paid (whether or not paid during the taxable year) then the excess shall be included in gross income. Amounts received as an annuity under an annuity or endowment contract shall be included in gross income; except that there shall be excluded from gross income the excess of the amount received in the taxable year over an amount equal to 3 per centum of the aggregate premiums or consideration paid for such annuity (whether or not paid during such year), until the aggregate amount excluded from gross income under this chapter or prior income tax laws in respect of such annuity equals the aggregate premiums or consideration paid for such annuity. In the case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance, endowment, or annuity contract, or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee shall be exempt from taxation under paragraph (1) or this paragraph.
The parties attempt to support their conflicting views by citing and discussing cases deemed to be basically analogous and by discussing the legislative history of certain sections of the revenue acts and administrative rulings under them. Petitioner points to the amendment of section 22(b)(2), supra, made by section 162(c) of the Revenue Act of 1942.
The amendment is not retroactive to the taxable years. Petitioner suggests that if the law prior thereto were as contended by respondent there would have been no occasion to enact it. The sections of the earlier acts are quoted and discussed (sec. 213(b)(2), Revenue Act of 1924; sec. 213(b)(2), Revenue Act of 1926; sec. 22(b)(2), Revenue Acts of 1928 and 1932; sec. 22(b)(2), Revenue Acts of 1934, 1936, and 1938; and sec. 22(b)(2), I.R.C.). It is unnecessary to set them out here. Summarizing them, it may be stated that prior to 1926 a recovery of premiums paid by way of annuity payments was to be excluded from gross income only if received by the insured as a return of premiums paid by him. By the amendment of 1926 the words ‘by the insured‘ and ‘by him‘ were eliminated, the expressed intention of Congress being to grant ‘to the various persons to whom the payments are made an exemption of an amount equal to their proportionate shares of the premiums paid ‘ rather than limiting the exemption to a return to the insured of a portion of the premiums paid by him.
(B) EMPLOYEES' ANNUITIES.— If an annuity contract is purchased by an employer for an employee under a plan with respect to which the employer's contribution is deductible under section 23(p)(1)(B) * * * the employee shall include in his income the amounts received under such contract for the year received except that if the employee paid any of the consideration for the annuity the annuity shall be included in his income as provided in subparagraph (A) of this paragraph, the consideration for such annuity being considered the amount contributed by the employee. * * *
Following this amendment the Treasury Department ruled that taxable income would result to the donee-beneficiary of an annuity only when the aggregate of the annuity payments received exceeds the amount of the premiums or consideration paid by the insured.
See Report of Conference Committee, H. R. Rept. No. 356, 69th Cong., 1st sess. Cf. H.R. Rept. No. 1, idem. C.B. 1939-1, Part 2, pp. 364 and 347.
I.T. 2635, C.B. XI-2, p. 63.
The section of the Internal Revenue Code shown in the margin supra was first enacted in 1934, the principal amendment to the former section being the addition of the language reducing the exclusion to the excess of the annuity payments over 3 per centum of the total premiums or consideration paid. The Treasury Department ruled that under it a widow, receiving payments under a contract purchased by her husband which provided for monthly payments to him for life and then to her for her life, should compute her taxable income from that source by excluding from her gross income the excess of the amount paid until the aggregate of the sums recovered under the Revenue Act of 1934 and prior Revenue Acts equals the consideration paid. The entire amount received thereafter is to be included in her gross income.
It was ruled, however, that the ‘aggregate of the amounts contributed by the employee beneficiary toward the purchase of a retirement annuity, but not the amount contributed by the employer, constitutes 'the aggregate premiums or consideration paid for such annuity’ within the meaning of section 22(b) of the Revenue Act of 1934.‘
I.T. 3033, C.B. XV-2, p. 131.
The same ruling held that contributions made by an employer toward the purchase of annuity contracts for the benefit of his employees did not constitute income constructively received by the employees.
I.T. 2891, C.B. XIV 1, p. 50; cf. I.T. 2874, C.B. XIV-1, p. 49; I.T. 3346, C.B. 1940-1, p. 62; I.T. 2984, C.B. XV-1, p. 87.
Petitioner, calling our attention to some of the rulings, relies upon the well established principle that administrative interpretations are entitled to great weight. Brewster v. Gage, 280 U.S. 327; Helvering v. Winmill, 305 U.S. 79. The argument, of course, is as applicable to the rulings in the last group (not cited by petitioner) as it is to those relied upon by him. It is perfectly clear from the series of rulings that section 22(b)(2) of the Revenue Act of 1934, which was continued in the same form in all later acts, has always been construed to limit the exclusion to the one who actually made the payment or his donee-beneficiary (usually one related to him by blood or marriage) and, so far as we have been able to find, no tribunal has ever held that an employee is entitled to deduct from his gross income the premium or consideration paid by his employer for an annuity unless the circumstances surrounding the payment were such as to require the employee to include the cost of the annuity in his gross income in the year it was purchased. Cf. Renton K. Brodie, 1 T.C. 275; Richard R. Deupree, 1 T.C. 113.
The rule of the Brodie and Deupree cases supra is not relied upon to any considerable extent by either party, though mentioned by each of them upon brief. In those cases the taxpayers' employer had adopted a plan for ‘special remuneration‘ for some of its executives. Deupree, the president, was to determine the persons to receive the additional compensation (including himself) and the amount to be paid to each. At his direction the employer purchased annuities in substantial amounts for him and his associates. As to Deupree, it was held that he was constructively in receipt of income. We therefore approved the Commissioner's action, including the amount in his gross income. The doctrine of constructive receipt was held to be inapplicable to Brodie and his associates (other than Deupree); but since the contracts, purchased and delivered to them, were valuable, were intended as extra compensation for services performed in the taxable year, and were issued upon their written applications without any restrictions or conditions attached as to term of employment, cessation of employment, or contribution by them, we held that the recipients were taxable under the broad and comprehensive language of section 22(a) of the revenue act. Whether a similar conclusion would have been justified if the Commissioner had attempted to include the amount expended by petitioner's employer in his gross income for the year 1934 is not before us. At the risk of supererogation it may be pointed out that most of the circumstances relied upon in the Brodie case appear to have been absent when the payment was made by petitioner's employer. In any event the petitioner obviously relied upon the rulings and interpretation referred to above and refrained from including in his gross income for 1934 any part of the substantial sum paid by his employer to the insurance company for his annuity. We do not suggest, however, that he is now estopped from making his present contention. Cf. Bennett v. Helvering, 137 Fed.(2d) 537.
In Raymond J. Moore, 45 B.T.A. 1073, the Commissioner urged that there should be included in the taxpayers' gross income the amount paid by an employer to the trustee of a pension plan and used by it in the purchase of contracts for the benefit of the participating employees. It was pointed out in the opinion that the Commissioner was basing his action upon the assumption that the policies were life insurance contracts and that he was not contending, ‘if the trust is within section 165 supra, and if the present policies cover retirement annuities, the payment of premiums therefore by the trustee would constitute a distribution to the insured of the amount of the premium paid.‘ In that connection a comparatively recent ruling of the Income Tax Unit was set out,
the essence of which was that the amounts contributed by the employer toward the purchase of annuity contracts for its employees were not required to be included in the employees' gross income for those years but, upon retirement, ‘the entire amount of each annuity payment will be taxable income to the employee if he made no contribution toward the purchase of the retirement annuity. If he made contributions, he will be taxed in the manner and to the extent provided in section 22(b)(2) of the Internal Revenue Code * * * .‘ We, in effect, approved the ruling and held that the portion of the premium paid which was applicable to the annuity feature of the contract was not to be included in the taxpayer's income for the year in which the payment was made. Cf. Phillips H. Lord, 1 T.C. 286. While it is true, as petitioner points out, that in the cited case a trust for employees was involved whereas none exists here, that is relatively unimportant. The issue was substantially the same as would have existed if the Commissioner had attempted to include the amount paid by petitioner's employer to the insurance company in his gross income for 1934— was it ‘actually distributed or made available‘ to him? In other words the Commissioner in his ruling and the Board of Tax Appeals in its opinion applied the same line of reasoning that was applied in the Brodie case, supra.
I.T. 3346, supra, footnote 10.
From what has been said it is obvious we have heretofore given our approval to all of the rulings above referred to, though the precise question now before us has been decided only by inference. If we should depart from the general scheme of the rulings and permit petitioner to recover, tax-free, all of the amount paid by his employer for the annuity rather than merely allow him ‘to recoup his original cost tax-free,‘ as conte plated by Congress
in the enactment of the Revenue Act of 1934, he would be given a special tax exemption. ‘Provisions granting special tax exemptions are to be strictly construed.‘ Helvering v. Northwest Steel Rolling Mills, Inc., 311 U.S. 46. Nevertheless, if the language used by Congress justifies such a conclusion it must be reached.
In H.R. Rept. No. 704, 73d Cong., 2d Sess. (C.B. 1930-1, Part 2, pp. 569, 570), it is said: ‘The present law does not tax annuities arising under contracts until the annuitant has received an aggregate amount of payments equal to the total amount paid for the annuity. * * * The change (addition of the 3 percent clause) continues the policy of permitting the annuitant to recoup his original cost tax-free but requires him to include in his gross income a portion of the annual payments in an amount equal to 3 percent of the cost of the annuity. * * * .‘ Cf. Senate Rept. No. 558, 73d Cong. 2d sess. (C.B. 1939-1, Part 2, p. 604).
The clause ‘aggregate premiums or consideration paid for such annuity‘ at first blush seems to be unambiguous and to connote that the payments need not be made by the annuitant. Ignoring for the time being the administrative interpretation, there seems to be but slight basis for a conclusion that payment need be made by any particular person. Yet there is some. First, it must be kept in mind that we are dealing with a revenue act, the purpose of which is to tax all ‘gains, profits, and income‘ including ‘compensation for personal service, of whatever kind and in whatever form paid.‘ (Sec. 22(a) of the various revenue acts.) It can not be doubted that annuities paid to former employees because of past services constitute compensation for personal services. Noel v. Parrott, 15 Fed.(2d) 669; certiorari denied, 273 U.S. 754; Old Colony Trust Co. v. Commissioner, 279 U.S. 730; Lucas v. Ox Fibre Box Co., 281 U.S. 115; Commissioner v. Bonwit, 87 Fed.(2d) 764; certiorari denied, 302 U.S. 694; Hooker v. Hoey, 27 Fed.Supp. 489; affd., 107 Fed.(2d) 1016; Helvering v. Knapp, 121 Fed.(2d) 454, reversing 40 B.T.A. 1145; Cora B. Beatty, Executrix, 7 B.T.A. 736; George Matthew Adams, 18 B.T.A. 381; N. Loring Danforth, 18 B.T.A. 1221; William J. R. Ginn, 47 B.T.A. 41, 48. Then, too, it will be noted that the provision with reference to annuities is contained in the section dealing with amounts received under life insurance and endowment policies, which are usually purchased by the insured himself and made payable to him or to members of his family. In this connection substantially the same language is used, the expressed intention being to tax as income such amounts as ‘exceed the aggregate premiums or consideration paid.‘ The obvious intention of Congress in dealing with the three types of contracts was to permit the insured or annuitant and his beneficiaries to recover tax-free the cost, i.e., the amount paid by them for the policies. This view is supported by the concluding sentence in the section, dealing with a transfer for a valuable consideration, under which only the sums actually paid by the transferee may be recovered tax-free. Moreover it accords with the general use of cost under the revenue acts. Compare, e.g. section 111, I.R.C., dealing with the determination of gain or loss upon sale, section 113, I.R.C., specifying the basis to be used, and section 23(l) and (m), allowing depreciation and depletion. Thus we need not rely solely upon the administrative rulings to support our conclusion that Congress intended to limit the deduction under section 22(b)(2), supra, to the aggregate premiums or consideration paid by the annuitant except where, as in the Deupree and Brodie cases, supra, the annuitant has been in receipt of taxable income in the year in which the annuity was purchased for him by his employer.
We approve the Commissioner's determination that the amount received by petitioner from the insurance company during each of the taxable years is to be included in his gross income. In view of the conclusion which has been reached it is unnecessary to discuss what respondent, upon brief, characterizes as his ‘plea of estoppel.‘
Respondent's affirmative claim for an increased deficiency is based upon the fact that petitioner had elected to receive a lesser amount during his life ($33,000 per annum instead of $41,250) to the end that his wife should receive an annuity of $24,882.53 in the event she should outlive him. The method by which this was accomplished is set out in the findings and footnote 3. Respondent cites Lucas v. Earl, 281 7.S. 111; Helvering v. Horst, 311 U.S. 112; Helvering v. Eubank, 311 U.S. 122, and opinions by this tribunal in which one earning income has assigned to another his right to receive it. Starting from the premise that the annuity was compensation for services rendered, respondent concludes that petitioner is taxable upon the portion which, he assumes, is being currently used to purchase an annuity for petitioner's wife.
At respondent's request finding has been made that the difference between a single life annuity of $41,250 and $33,000, if paid to the insured annually during his life, would have created a fund sufficient to provide for an annuity of $24,882.53 for his wife upon his death if she survived him. While this finding is literally within the evidence, it must be remembered that the witness upon whose testimony it is based, an actuary for the insurance company, was merely acquiescing to questions asked of him in nontechnical language with reference to the essence of the actuarial computation. (See footnote 3, supra.) Actually, however, petitioner simply exercised a right given him under the contract (cf. Katharine C. Pierce, 2 T.C. 832, to receive retirement annuity payments ‘for a reduced amount * * * and that it * * * be continued, after his death, to his designated dependent, should such person survive him.‘
Having made such election, he could not thereafter make another without the consent of the insurance company. In other words the maximum amount which he may now receive is $33,000 per annum.
Section 14 of III General Provisions‘ of the contract provides, inter alia:‘At any time prior to the normal retirement date and provided Retirement Annuity payments have not been commenced, an Employee may request the Insurance Company that his Retirement Annuity commence on the normal retirement date for a reduced amount, as determined in the second succeeding paragraph, and that it shall be continued, after his death, to his designated dependent, should such person survive him; provided, however, that, if the death of the Employee or such person occur prior to the normal retirement date or optional retirement date, whichever date is earlier, such request shall be inoperative. If an Employee who has exercised the option described in this paragraph should remain in active service subsequent to the normal retirement date and should die before the commencement of Retirement Annuity payments, the Insurance Company will commence to pay to his designated dependent, should such person survive him, the reduced amount of Retirement Annuity as determined in the second succeeding paragraph.‘ * * * Such request, when granted by the Insurance Company, cannot be rescinded without its consent. The reduced amount of Retirement Annuity, payable to an Employee who has requested to have the Retirement Annuity continued after his death to a designated dependent depends upon the age and sex of both the Employee and the designated dependent.
Respondent places substantial reliance upon Duran v. Commissioner, 123 Fed. (2d) 324, and quotes some language which he deems to be especially pertinent to the present question. In that case the taxpayer, having served as agent of an insurance company for 20 years and having sold more than $50,000 of life insurance each year, became entitled to receive monthly payments so long as he should live, provided he did not enter the service of any other life insurance company. Prior to 1934 he assigned to his sister all sums to be subsequently paid, with provision that in the event she should predecease him all benefits under the assignment should revert to him. The court applied the rationale of Helvering v. Eubank, supra, and approved our holding that the amount received by the sister must be included in Duran's income. The language upon which respondent places his reliance is:
‘ * * * For income tax purposes, the situation was the same as though the insurance company had paid the sums to him and he had passed them on to his sister. * * * ‘
He says: ‘the situation (here) is the same as though the insurance company had paid petitioner $41,250 and he had returned to it $8,250.‘ We do not agree. His own careful analysis elsewhere in his brief shows what occurred. Petitioner converted $33,132.53 of his annuity to a joint and survivorship annuity of $24,882.53. He is entitled to receive this amount plus $8,117.47, or $33,000, for the remainder of his life. If he predeceases his wife she will receive the $24,882.53 for the remainder of her life. Assuming that she will include in her gross income the amount which she will receive— and without attempting to judge a controversy not before us it is difficult to see why she will not be required to do so— it is obvious that every dollar paid under the contract will bear its fair burden of tax. The administrative difficulty of attempting to evaluate the wife's annuity for the purpose of the gift tax, the burden of requiring an annuitant to pay a large tax upon income which he has not received and the inequities which would be bound to result if respondent's present contention be upheld are all obviated by applying the common-sense principles set out in his rulings. Respondent's claim for an increased deficiency is denied.
Received by the Court.
Decision will be entered approving the deficiencies as determined.