Comm'r of Internal Revenue

This case is not covered by Casetext's citator
Tax Court of the United States.Jun 23, 1943
2 T.C. 210 (U.S.T.C. 1943)

Docket No. 112203.



Henry Mannix, Esq., and Victor E. Ferrall, Esq., for the petitioner. Robert S. Garnett, Esq., for the respondent.

The purchase by petitioner of two annuity contracts providing for the payment of a total of $200 per month to an employee being retired after many years of valuable service, rendered with the understanding that retirement would be on a pension, held to be payment of additional compensation for such service and, accordingly, the cost of the annuity feature of each contract is not subject to gift tax. Further held that additional amounts paid by petitioner for the inclusion in each annuity contract of a refund provision obligating the insurer, in case of death of the annuitant before the total cost of the contract had been paid out in monthly installments, to pay to certain members of petitioner's family the balance of such cost, constituted taxable gifts of future interests in property with respect to which petitioner was not entitled to an exclusion under section 505(b) of the Revenue Act of 1938. Henry Mannix, Esq., and Victor E. Ferrall, Esq., for the petitioner. Robert S. Garnett, Esq., for the respondent.

Respondent has determined a deficiency in gift taxes of the petitioner for the year 1939 in the sum of $9,775.49, resulting from his including in petitioner's total gifts in that year the amount of $47,316.60 constituting the cost to the petitioner of two annuity contracts in which a former employee of petitioner was named as beneficiary, with refund provisions for the benefit of certain other individuals.


Petitioner is a resident of Englewood, New Jersey. Her return for 1939 was filed with the collector for the fifth district of New Jersey.

In 1919 the petitioner and her husband, since deceased, employed a Mrs. Josephine Grimes-Graeme, hereinafter referred to as Mrs. Graeme, as a governess for the two younger of their four children. Mrs. Graeme is not related to petitioner or to any member of her family and was employed after careful investigation. Upon her employment she was given complete charge of petitioner's two younger children and during petitioner's absence had general supervision of all of petitioner's children. Later her duties were enlarged to include those of petitioner's confidential secretary and general housekeeper. She had charge of petitioner's household, which, toward the end of Mrs. Graeme's employment, consisted of a house of more than 20 rooms and from 12 to 16 household servants. She did most of the shopping for petitioner and petitioner's household, including clothes for petitioner and her children, gifts given by petitioner and her family, and furnishings and supplies for petitioner's home.

Mrs. Graeme continued in the employment of petitioner until retired in 1939. During all of this time she carried for petitioner great responsibilities with perfect satisfaction to petitioner. During the early part of her employment Mrs. Graeme lived in petitioner's home where she occupied a room rent free and was supplied with food. During the last few years of her employment Mrs. Graeme lived in an apartment in New York City, the rent of which was paid by petitioner, together with the cost of upkeep, maid service, and food. The total cost to petitioner for maintaining this apartment was approximately $3,000 per year. This apartment was maintained for the convenience of the petitioner, who frequently used it as a place of rest while in New York City on shopping trips. It was also used by petitioner's children when in New York for social events.

Mrs. Graeme was originally employed at a salary of $150 per month, which was later increased to $250 per month before 1924, which salary she was receiving at the time of her retirement. As early as 1924 petitioner and her husband discussed the question of increasing Mrs. Graeme's compensation and decide; that provision for her security on retirement was preferable. During the years following this, petitioner and her husband on a number of occasions discussed with Mrs. Graeme the question of her employment and ultimate retirement. Both assured her that her security after retirement would be provided by them by a pension to be paid her.

In 1939 the activities of petitioner were not as varied as in previous years. Her husband had died in 1931 and her children had married and established homes of their own. Her need for Mrs. Graeme's assistance was not as great as formerly. Upon these conditions she decided that Mrs. Graeme should be retired from service.

After consultation with her financial secretary, petitioner purchased two annuity contracts, one from the Union Central Life Insurance Co. and the other from the Home Life Insurance Co., each providing for payment to Mrs. Graeme of $100 per month for life. At the time of her purchase of these two annuity contracts petitioner found that for additional payments she could have certain refund provisions included in the contracts, obligating the insurer, in case the life annuitant died before the full amount of the consideration paid for the annuity contracts had been distributed in monthly payments, to continue payments to named beneficiaries until the full amount of the consideration paid had been returned. Petitioner thereupon directed that these refund provisions be included in the annuity contracts, and this was done. In each contract the primary beneficiaries named under the refund provision were Annie S. Cutter and Edith Cutter Yates, sisters of petitioner, and the secondary beneficiaries were Anne Morrow Lindbergh, Constance Morrow Morgan, and Dwight W. Morrow, Jr., children of petitioner.

The total paid for these two annuity contracts was $47,316.60. Of this total, the sum of $42,687 was the cost of the annuity contracts without the refund provisions. The cost of the inclusion of the refund provision in the two contracts was $4,629.60.

On September 30, 1939, petitioner sent Mrs. Graeme the following letter:


For twenty years you have been serving me and my family. Your services have been invaluable, and I think that you have earned the right to be retired from your labors with some security for the balance of your life. You and I have talked about this at numerous times, though it has always been hard to think of the parting.

I cannot express in a letter my appreciation for all that you have done throughout these many years for me and for my family, but I shall always be grateful to you. This note is to confirm the fact that you are to retire at the end of this month upon a pension of $200, a month for the balance of your life. I personally have arranged for this pension through contracts which I have purchased from the Union Central Life Insurance Company and from the Home Life Insurance Company, each of which, beginning with the end of October 1939, will pay you every month $100, so long as you live.

Affectionately yours,


Mrs. Cecil R. Graeme,

care Miss M. M. Shiff,

135 West 79th Street,

New York, New York.

In procuring the two annuity contracts above mentioned it was petitioner's intent to provide a pension for Mrs. Graeme as additional compensation for services rendered her by the latter through many years.


LEECH, Judge:

Our finding that the intent of petitioner in procuring the two annuity contracts, as set out in our findings, was to provide additional compensation for services rendered by the annuitant under those contracts answers the first question involved in the issue of whether or not these annuities constituted gifts by petitioner. The payment as additional compensation for services can not be a gift, since it was intended to be and was additional consideration for those services. Poorman v. Commissioner, 131 Fed.(2d) 946; Willkie v. Commissioner, 127 Fed.(2d) 953; Fisher v. Commissioner, 59 Fed.(2d) 192; Noel V. Parrott, 15 Fed.(2d) 669; Schumacher v. United States, 55 Fed.(2d) 1007. The fact that the services were rendered during years prior to the payment of compensation therefor does not affect that conclusion here. Lucas v. Ox Fibre Brush Co., 281 U.S. 115. Cf. Bogardus V. Commissioner, 302 U.S. 34.

We accordingly hold that the cost to petitioner of the two annuity contracts, exclusive of the refund provision, or a total of $42,687, was additional compensation paid by petitioner to Mrs. Graeme and not a gift.

The second question has to do with the refund provisions. These provisions, included by petitioner in the two annuity contracts at a total cost of $4,629.60, are entirely different in character. The beneficiaries under these provisions were the sisters and children of the petitioner. No consideration was even claimed by petitioner as passing from the beneficiaries to her and donative intent in the inclusion of these provisions in the two contracts is clear. We hold that the cost of these refund provision, in the total amount of $4,629.60, was a gift. Since the enjoyment of the interests represented by the payments to be made under these provisions of both contracts was contingent upon the death of the annuitant prior to her receipt of monthly payments totaling less than the cost of the contracts, these gifts are of future interests with respect to which petitioner is not entitled to an exclusion under section 505(b) of the Revenue Act of 1938. United States v. Pelzer, 312 U.S. 399; Fletcher Trust Co., Trustee, 1 T.C. 798; Mary M. Hutchings, 1 T.C. 692.

Decision will be entered under Rule 50.