1949 U.S. Tax Ct. LEXIS 172">*172 Decision will be entered for the respondent.
Payments to petitioner to continue for her life and resulting from surrender during his lifetime of insurance policies on her husband's life of which she was beneficiary, held annuities which respondent did not err in taxing to her under the 3 per cent annuity provision of Internal Revenue Code, section 22 (b) (2).
12 T.C. 1028">*1028 This proceeding was brought for a redetermination of a deficiency of $ 4,622.78 in petitioner's income tax for 1940.
The only litigated issue is the inclusion in petitioner's income, under the 3 per cent annuity provision of Internal Revenue Code, section 22 (b) (2), of $ 4,910.43 representing a portion of the amounts received by petitioner from certain insurance companies in 1940.
The case was submitted upon a stipulation of facts and evidence adduced at the hearing. Those facts hereinafter appearing which are not from the stipulation are otherwise found from the record.
FINDINGS OF FACT.
The stipulated facts are hereby found accordingly.
Petitioner is an individual who resides at Detroit, Michigan. Her income tax return for the calendar year 1940 was filed with the collector of internal revenue at Detroit, Michigan.
In November 1923 petitioner's husband, Frederick J. Fisher, entered into ten insurance contracts1949 U.S. Tax Ct. LEXIS 172">*174 with nine different insurance companies. All of the contracts were annual premium life insurance policies issued on the life of Frederick J. Fisher. Petitioner was the irrevocable beneficiary of each policy, and during the time the policies were in force she assumed and paid all the premiums due thereon.
A list of the ten insurance policies, showing the name of the insurance company issuing the policy, the number of the policy, the face 12 T.C. 1028">*1029 amount of the policy, the annual premium payable thereon, and the total amount of net premiums paid as of the effective date of the surrender of the policy is set forth below:
| Face | ||
| Name of company | Number of | amount of |
| policy | policy | |
| National Life Ins. Co. of Vermont | 425775 | $ 50,000 |
| New England Mutual Life Ins. Co. | 488234 | 100,000 |
| Mutual Benefit Life Ins. Co | 1114360 | 50,000 |
| State Mutual Life Assurance Co. of Worcester, Mass | 263574 | 100,000 |
| Penn Mutual Life Ins. Co | 1083755 | 150,000 |
| Union Central Life Ins. Co | 779419 | 100,000 |
| Union Central Life Ins. Co | 779177 | 100,000 |
| Massachusetts Mutual Life Ins. Co | 630314 | 100,000 |
| Connecticut Mutual Life Ins. Co | 493147 | 100,000 |
| Provident Mutual Life Ins. Co | 446502 | 100,000 |
| Total |
| Total net | ||
| Name of company | Annual | premiums |
| premium | paid | |
| National Life Ins. Co. of Vermont | $ 1,927.50 | $ 26,029.22 |
| New England Mutual Life Ins. Co | 3,950.00 | 51,849.00 |
| Mutual Benefit Life Ins. Co | 1,927.50 | 25,946.80 |
| State Mutual Life Assurance Co. of Worcester, Mass | 3,855.00 | 52,456.00 |
| Penn Mutual Life Ins. Co | 5,782.00 | 78,718.50 |
| Union Central Life Ins. Co | 3,641.00 | 53,081.00 |
| Union Central Life Ins. Co | 3,641.00 | 53,081.00 |
| Massachusetts Mutual Life Ins. Co | 3,855.00 | 64,313.80 |
| Connecticut Mutual Life Ins. Co | 3,855.00 | 53,226.80 |
| Provident Mutual Life Ins. Co | 3,689.00 | 49,793.00 |
| Total | 508,495.12 |
Policy No. 779177, issued by the Union Central Life Insurance Co. is identical in every respect with policy No. 779419, issued by the same company.
Each of the ten insurance contracts issued to petitioner's husband, and listed above, contained a clause giving the insured or the beneficiary, upon proper application, the right to have the proceeds of the policy payable in installments, in accordance with various modes of settlement provided in the policy, and in lieu of payment of the proceeds in a single sum. Such optional modes of settlement, although variously1949 U.S. Tax Ct. LEXIS 172">*176 worded in the several policies, were substantially the same in all ten policies. The settlement option provisions contained in the National Life Insurance contract are set forth below:
Instalment Settlements. (a) If this policy is not assigned, the Insured may provide, from time to time, by written notice and the return of this policy for endorsement, that the Company will pay all or a part of the policy proceeds not less than One Thousand Dollars, as follows:
(1) It will retain all or part of such proceeds in its general funds and annually pay three per cent interest thereon to the beneficiary for the time specified, first payment one year after maturity of this policy; and at the end of the specified period or on the death of the beneficiary it will pay the principal sum and accrued interest as the written notice directs: or
(2) It will pay all or part of such proceeds to the beneficiary in a specified number of annual, semi-annual, quarterly or monthly instalments, as per provision No. 2 in the table and formula on page four hereof, first payment immediate: or
(3) It will pay all or part of such proceeds to the beneficiary in a specified number of annual, semi-annual, quarterly1949 U.S. Tax Ct. LEXIS 172">*177 or monthly instalments certain and during the after-lifetime of the beneficiary, as per provision No. 3 in the table and formula on page four hereof, first payment immediate: or
(4) It will retain all or part of such proceeds and pay the same under such combination of the foregoing provisions or in such other manner as may be 12 T.C. 1028">*1030 hereafter mutually agreed and incorporated in this policy by rider or endorsement.
On the death of the beneficiary before all instalments certain under paragraphs 2, 3 or 4 above have been paid, the Company will pay the value of the unpaid instalments certain commuted at three per cent interest compounded annually to the executors, administrators or assigns of the beneficiary unless otherwise directed by the written notice.
Policies issued by such of the ten insurance companies as were mutual or participating companies provided that all installments, after the first, should be increased by such surplus interest earnings as should from time to time be determined and apportioned thereto by the company.
Each of the policies contains tables showing the yearly or monthly installments on the basis of $ 1,000 of insurance proceeds, payable under options similar1949 U.S. Tax Ct. LEXIS 172">*178 to those designated as (2) and (3) in the National Life Insurance contract quoted above. Payments under those options were computed in accordance with the number of installments to be paid or with the attained age of the beneficiary and with the length of the period certain, if any, for which the payments were to be made. In only one policy, that of the Provident Mutual Life Insurance Co., policy No. 446502, was the sex of the payee a factor in determining the amount of the monthly installment payments.
In none of the ten insurance contracts was the term "annuity" or the words "payable as an annuity" used to designate or describe any of the various optional methods of settlement. In each policy payments made under such settlement options were described and identified as "installment payments" of the "proceeds" of the policy.
Each of the ten policies contained provisions for nonforfeiture in the event of default in the payment of premiums. Most of the policies provided that in such an event the insured might elect one of the following options: (1) Cash value, (2) paid-up insurance, and (3) extended term insurance from the due date of the premium defaulted. In those policies where1949 U.S. Tax Ct. LEXIS 172">*179 no election was provided, the insured might receive the cash value of the policy upon its surrender.
In addition to the above mentioned ten contracts of insurance, petitioner's husband in November 1923 entered into eight other insurance contracts with five different insurance companies. All of these contracts, like the ten contracts mentioned above, were annual premium life insurance policies on the life of Frederick J. Fisher. Petitioner was also the irrevocable beneficiary of each of these policies and during the time these policies were in force she assumed and paid all of the premiums due thereon.
12 T.C. 1028">*1031 A list of the eight life insurance polices, showing the name of the insurance company, the number of the policy, and the face amount of the policy, is set forth below:
| Policy | Face | |
| Name of company | number | amount |
| Prudential Life Ins. Co | 4472404 | $ 200,000 |
| MutualLife of New York | 3219193 | 200,000 |
| MutualLife of New York | 3219194 | 200,000 |
| Northwestern Mutual | 1694523 | 100,000 |
| Northwestern Mutual | 1694524 | 20,000 |
| Equitable of Iowa | 256177 | 100,000 |
| Equitable of Iowa | 256178 | 30,000 |
| Equitable Life Assurance Society | 3283012 | 200,000 |
In June 1940 Harold R. Kelly, 1949 U.S. Tax Ct. LEXIS 172">*180 a life insurance agent, met with petitioner, her husband, and her counsel and was informed that petitioner was the irrevocable beneficiary and beneficial owner of 18 life insurance contracts, and that it was her desire that he effect the settlement option of 20 years certain and life thereafter on all 18 contracts.
Pursuant to petitioner's desire, Kelly conferred with the home offices or local representatives of all 14 companies involved. In response to a request made by 4 of the companies involved, Kelly wrote letters to each of those companies, requesting the surrender of the policy and that the proceeds be paid for 20 years certain and life thereafter, in accordance with the options set forth in the policies. The letters also requested that, in the event of petitioner's death prior to the expiration of the 20-year period, payments be continued to her husband, if he should then be living. In the event her husband predeceased her, petitioner requested that payments be commuted and paid to her estate.
Nine of the insurance companies issuing the ten contracts in the first group listed above complied with petitioner's request. Five of the insurance companies issuing the eight contracts1949 U.S. Tax Ct. LEXIS 172">*181 listed in the other group above denied the request, giving as their reason that the settlement options, as they construed the contracts, were available only to the insured and not to the beneficiary.
Each of the nine companies which complied with petitioner's request for the exercise of the option settlement issued to her an instrument or certificate. A list of these certificates issued by the nine insurance companies, showing as to each the name of the issuing company, the date of the instrument issued pursuant to petitioner's application or request, the number of such instrument or certificate, the title or description which it bears, the amounts payable annually to petitioner under the terms of such instruments or certificates, and the amounts received by her thereunder in 1940, is shown below: 12 T.C. 1028">*1032
| Date of | |||
| instrument | |||
| issued by | |||
| Name of insurance | insurance | Number of | Title or description |
| company | company on | instrument | |
| petitioner's | |||
| request | |||
| National Life Ins. Co. | |||
| of Vermont. | Nov. 6, 1940 | I-C425775 | Installment certificate. |
| New England Mut. Life | Nov. 1, 1940 | 9454 | Income certificate. |
| Ins. Co. | |||
| Mutual Benefit Life Ins. | Sept. 19, 1940 | S-1124 | Continuous installment |
| Co. | certificate. | ||
| State Mutual Life Assur. | Aug. 10, 1940 | 3248 | Nonnegotiable installment |
| Co. of Worcester, Mass. | certificate. | ||
| Penn Mutual Life Ins. Co. | Sept. 20, 1940 | 1083755 | Settlement certificate. |
| Union Central Life Ins. | 779177, | (None) | |
| Co. | Sept. 17, 1940 | 779419 | |
| Massachusetts Mutual Life | July 25, 1940 | 630314 | Supplemental agreement. |
| Ins. Co. | |||
| Connecticut Mutual Life | July 1, 1940 | 1387 | Continuous installment |
| Ins. Co. | certificate. | ||
| Provident Mutual Life | |||
| Ins. Co. | Aug. 10, 1940 | 8339 | Installments certain and |
| deferred installment | |||
| certain. | |||
| Total | |||
| Excess interest paid to petitioner in 1940 by Union Central Life | |||
| Ins. Co | |||
| Total |
| Amounts | Amounts | |
| Name of insurance | payable | received |
| company | to | by |
| petitioner | petitioner | |
| annually | in 1940 | |
| National Life Ins. Co. | ||
| of Vermont. | $ 1,362.72 | $ 340.68 |
| New England Mut. Life | 2,482.08 | 620.52 |
| Ins. Co. | ||
| Mutual Benefit Life Ins. | 1,202.16 | 535.73 |
| Co. | ||
| State Mutual Life Assur. | 2,380.72 | 1,190.36 |
| Co. of Worcester, Mass. | ||
| Penn Mutual Life Ins. Co. | 3,550.24 | 1,775.12 |
| Union Central Life Ins. | ||
| Co. | 4,468.72 | 2,234.36 |
| Massachusetts Mutual Life | 2,351.04 | 1,175.52 |
| Ins. Co. | ||
| Connecticut Mutual Life | 2,218.32 | 1,175.46 |
| Ins. Co. | ||
| Provident Mutual Life | ||
| Ins. Co. | 2,344.32 | 988.75 |
| Total | 10,036.50 | |
| Excess interest paid to | ||
| petitioner in 1940 by | ||
| Union Central Life | ||
| Ins. Co | 80.01 | |
| Total | 10,116.51 |
An analysis of the various instruments issued by the nine insurance companies paying petitioner the proceeds of the ten life policies in installments indicates that the instruments were variously denominated as indicated above; that the arrangements were being made "by reason of termination by surrender" upon request and upon the surrender of the policies; that payments would be in periodic installments for petitioner's life, guaranteed1949 U.S. Tax Ct. LEXIS 172">*183 for a period of years; that petitioner should have the right to withdraw the commuted value of any unpaid stipulated installments; and that survivorship rights should exist in her husband, should she die before the completion of the guaranteed installments.
At the time of the surrender of the ten policies issued in 1923 and the issuance by the insurance companies of the above instruments, the cash surrender values of the policies were as follows:
| Company | Cash surrender value |
| National Life Insurance Co. of Vermont | $ 19,534.62 |
| New England Mutual Life Insurance Co | 39,444.00 |
| Mutual Benefit Life Insurance Co | 19,604.50 |
| State Mutual Life Assurance Co., Worcester, Mass | 38,592.25 |
| Penn Mutual Life Insurance Co | 56,894.81 |
| Union Central Life Insurance Co | 36,348.80 |
| Union Central Life Insurance Co | 36,348.80 |
| Massachusetts Mutual Life Insurance Co | 38,592.00 |
| Connecticut Mutual Life Insurance Co | 38,592.08 |
| Provident Mutual Life Insurance Co | 37,000.00 |
| Total | 360,951.86 |
12 T.C. 1028">*1033 In the case of all companies mentioned above, except National Life Insurance Co. of Vermont and Connecticut Mutual Life Insurance Co., the guaranteed payments to petitioner as set out in the instruments1949 U.S. Tax Ct. LEXIS 172">*184 issued by them to her in 1940 were computed under the option settlements appearing in the contracts issued by each of those companies on the life of Frederick J. Fisher in 1923 and for 20 years certain and for life thereafter. In the case of National Life Insurance Co. of Vermont, the guaranteed payments were computed under the option settlement provision contained in the contract issued by that company on the life of Frederick J. Fisher in 1923 for 15 years certain and for life thereafter.
In the case of Connecticut Mutual Life Insurance Co. the guaranteed monthly payments were for 20 years certain and for life thereafter, but were computed at the guaranteed rates as they appeared in the option settlement provisions of similar life insurance contracts or policies being issued by Connecticut Mutual Life Insurance Co. in 1940, at the time of the surrender by petitioner of the 1923 insurance policy or contract, rather than at the rates as they appeared in the original contract.
As to the eight policies with respect to which settlement options were not exercised, petitioner on various dates in 1940 surrendered all of such eight policies to the issuing companies, and in each case received1949 U.S. Tax Ct. LEXIS 172">*185 the cash surrender values in a lump sum. The dates of surrender and the cash surrender values received by petitioner on the surrender of those policies are as follows:
| Cash surrender | ||
| Company | Surrender | value received |
| date | by petitioner | |
| Prudential Life Insurance Co | Aug. 10, 1940 | $ 75,240.00 |
| Mutual Life Insurance Co. of New York | Oct. 10, 1940 | 76,934.00 |
| Mutual Life Insurance Co., of New York | Oct. 10, 1940 | 76,934.00 |
| Northwestern Mutual Life Insurance Co | Aug. 10, 1940 | 46,273.20 |
| Do | Aug. 10, 1940 | |
| Equitable Life Insurance Co. of Iowa | July 15, 1940 | 36,549.35 |
| Do | July 15, 1940 | 10,964.80 |
| Equitable Life Assurance Society | Aug. 10, 1940 | 78,048.14 |
As to policy No. 3283012 issued by the Equitable Life Assurance Society in the face amount of $ 200,000, petitioner used the cash surrender value of $ 78,048.14 to purchase from the same insurance company on September 17, 1940, a refund annuity contract paying her an annual annuity of $ 4,337.16.
With the cash surrender values received by petitioner upon the surrender of the remaining 7 contracts of insurance, amounting in the aggregate to $ 322,895.35, petitioner by the use of $ 311,000 thereof purchased 13 refund1949 U.S. Tax Ct. LEXIS 172">*186 annuity contracts from various insurance companies, 12 T.C. 1028">*1034 all of these purchases being made at various dates during 1940. A list of these annuity contracts, showing as to each the name of the issuing company, the date of purchase, contract number, purchase price, and annual income payable to petitioner pursuant to the terms of the contract, is set forth below:
| Annual | ||||
| Name of issuing company | Date of | Policy | Purchase | income |
| purchase | number | price | payable to | |
| petitioner | ||||
| Berkshire Life Ins. Co | 10-7-40 | 7696AN | $ 10,000 | $ 522.40 |
| Berkshire Life Ins. Co | 12-24-40 | 7764AN | 1,000 | 53.80 |
| Connecticut Mutual Life Ins. Co | 8-22-40 | 15339 | 25,000 | 1,353.00 |
| Equitable Life Ins. Co. of Iowa | 8-28-40 | A-40282 | 25,000 | 1,337.00 |
| Guardian Life Ins. Co. of America | 9-12-40 | 748840 | 10,000 | 535.60 |
| Home Life Ins. Co | 10-3-40 | 479553 | 25,000 | 1,339.00 |
| John HancockLife Ins. Co | 9-12-40 | 064034 | 50,000 | 2,608.00 |
| Life Ins. Co. of Virginia | 10-8-40 | B-728 | 25,000 | 1,315.00 |
| National Life Ins. Co | 8-26-40 | 728049 | 25,000 | 1,339.00 |
| Reliance Life Ins. Co | 10-7-40 | 5494 | 25,000 | 1,305.00 |
| State Mutual Life Assurance Co. | ||||
| of Worcester, Mass | 9-5-40 | 3260 | 25,000 | 1,339.28 |
| Union Central Life Ins. Co | 10-7-40 | 1356252 | 50,000 | 2,682.44 |
| Union Central Life Ins. Co | 10-15-40 | 1357064 | 15,000 | 804.72 |
| Total | 311,000 | 16,534.24 |
1949 U.S. Tax Ct. LEXIS 172">*187 Each of the 14 annuity contracts purchased by petitioner was described in the contract as an "annuity." Each contract described the payments made thereunder as "annuity payments." In each contract petitioner was designated as the "annuitant" and her husband was designated as the "beneficiary." Each contract had a refund provision whereby if petitioner should die before the total annuity payments exceeded the amount of the premium (or in one case a minimum) then the difference between the amounts paid and the premium without interest would be paid to the beneficiary, Frederick J. Fisher. If no beneficiary were named, the commuted balance would be payable to petitioner's executors. Only 3 of the 14 annuity contracts contain provisions for the surrender of the contract. In each of those 3 contracts, namely, those of the Equitable Life Assurance Co., the Life Insurance Co. of Virginia, and the Reliance Life Insurance Co., the annuitant had the right to surrender the contract and receive the commuted value of the remaining annuity payments necessary to make the total payments equal to the premium paid (or the minimum return). In none of the contracts were annuity payments to continue1949 U.S. Tax Ct. LEXIS 172">*188 after the surrender of the contract.
Petitioner was born on December 2, 1881, and at the time of the issuance by the various insurance companies of the settlement certificates she was classified by some of the companies as having an age of 58 years and by others as having an age of 59 years in determining the amounts payable to her computed under the option settlement provisions of the 10 contracts.
12 T.C. 1028">*1035 The guaranteed payments computed on a monthly basis to a female aged 58 for 20 years certain and for life thereafter for each $ 1,000 of cash value proceeds and to a female aged 59, as provided for in the 10 policies issued on the life of Frederick J. Fisher in 1923, are as follows:
| To a female | To a female | |
| Company | aged 58 | aged 59 |
| National Life Insurance Co. of Vermont | $ 5.21 | $ 5.25 |
| New England Mutual Life Insurance Co | 5.21 | 5.25 |
| Mutual Benefit Life Insurance Co | 5.07 | 5.11 |
| State Mutual Life Assurance Co., Worcester, Mass | 5.12 | 5.17 |
| Penn Mutual Life Insurance Co | 5.21 | 5.25 |
| Union Central Life Insurance Co | 5.08 | 5.12 |
| Massachusetts Mutual Life Insurance Co | 5.09 | 5.14 |
| Connecticut Mutual Insurance Co | 4.99 | 5.04 |
| Provident Mutual Life Insurance Co | 5.23 | 5.28 |
1949 U.S. Tax Ct. LEXIS 172">*189 A statement of the guaranteed monthly payments to a female at the age of 58, and likewise to a female at the age of 59, for 20 years certain and life thereafter under the option provisions of the contracts issued by the same 9 companies in the year 1940 is as follows:
| To a female | To a female | |
| Company | aged 58 | aged 59 |
| National Life Insurance Co. of Vermont | $ 4.83 | $ 4.91 |
| State Mutual Life Assurance Co. of Worcester, Mass | 4.62 | 4.68 |
| New England Mutual Life Insurance Co | 4.62 | 4.68 |
| Mutual Benefit Life Insurance Co | 4.81 | 4.86 |
| Penn Mutual Life Insurance Co | 4.71 | 4.76 |
| Provident Mutual Life Insurance Co | 4.62 | 4.67 |
| Union Central Life Insurance Co | 4.62 | 4.68 |
| Connecticut Mutual Life Insurance Co | 4.73 | 4.79 |
| Massachusetts Mutual Life Insurance Co | 4.59 | 4.65 |
The nine insurance companies which issued settlement certificates to petitioner in 1940 under the option provisions of 10 life insurance contracts did not issue an annuity contract in the year 1940 on the basis of 20 years certain or 15 years certain. The 9 companies were offering only a cash refund and an installment refund annuity and annuities of that type.
Tables used by an actuary are different in the case of annuity1949 U.S. Tax Ct. LEXIS 172">*190 calculations from life insurance calculations. In the calculations of an annuity a mortality table that is based on the life on an annuitant is used. The common table is the 1937 Standard Annuitant Table. Until recently life insurance rates were based on the American Experience Table of Mortality.
The annual statement submitted by insurance companies to the State of Michigan is a standardized annual statement. In this report a distinction is drawn between payments made by an insurance company under installment options and payments made under annuity 12 T.C. 1028">*1036 contracts. The item under which an insurance company reports disbursements for its annuities is as follows: "For annuities involving life contingencies, excluding payments on supplementary contracts (including cash refund payments) . . ." Payments made under settlement options are reported under the following heading: "Paid for claims on supplementary contracts." This section is subdivided as follows: "(a) involving life contingencies" and "(b) not involving life contingencies." A similar form was used in the year 1940.
Respondent treated as the cost of annuities the surrender value of the ten policies in the amount of 1949 U.S. Tax Ct. LEXIS 172">*191 $ 360,951.86 and in determining the deficiency in controversy added to petitioner's income for the taxable year 3 per cent of that amount (adjusted to the quarterly payments received in the taxable year) in the amount of $ 4,910.43.
OPINION.
Section 22 (b) (1) and ( 2) of the Internal Revenue Code, 1 which is involved here, deals in terms with three types of contract -- life insurance, annuity, and endowment. Subsection (b) (1), covering amounts received under a life insurance contract paid by reason of the death of the insured, is concededly inapplicable. Cf. Grace R. Maxson Hall, 12 T.C. 419. Subsection (b) (2) refers in its first sentence to "Amounts received * * * under a life insurance * * * contract," but excepts "amounts received as annuities" thereunder. Its second sentence prescribes the treatment of "amounts received as an annuity," but this is in terms limited to payments "under an annuity or endowment contract."
1949 U.S. Tax Ct. LEXIS 172">*192 Were we to accept petitioner's contention that the policies taken out by her on her husband's life were life insurance contracts, and that the amounts in controversy were paid thereunder, we nevertheless could not doubt that the payments she received from the insurance companies after exercising her settlement option to have the surrender 12 T.C. 1028">*1037 value paid to her in annual payments for her life were annuities. Anna L. Raymond, 40 B. T. A. 244; affd. (C. C. A., 7th Cir.), 114 Fed. (2d) 140; certiorari denied, 311 U.S. 710">311 U.S. 710; George H. Thornley, 2 T.C. 220; reversed, other issue (C. C. A., 3d Cir.), 147 Fed. (2d) 416; see Burnet v. Whitehouse, 283 U.S. 148">283 U.S. 148. On this hypothesis, what we have here would thus be an amount received as an annuity under a life insurance contract, and not paid by reason of the death of the insured, as in Grace R. Maxson Hall, supra -- a situation expressly excluded from the first sentence and not specifically included in the second.
Subsection (b) 1949 U.S. Tax Ct. LEXIS 172">*193 of section 22 is an exclusion section. It eliminates from the "broad sweep" of section 22 (a) the amounts therein described. Without it, the assumption must be that such payments would be taxable to their full constitutional extent. J. Giltner Igleheart, Sr., 10 T.C. 766; affd. (C. A., 7th Cir.), 174 Fed. (2d) 605; cf. Helvering v. Stockholms Enskilda Bank, 293 U.S. 84">293 U.S. 84. It follows that were we to adopt petitioner's reasoning that these payments are made under a life insurance contract, they are not excluded by subsection (b) and hence not only the 3 per cent included by respondent, but some larger part 2 might be taxable income under section 22 (a).
1949 U.S. Tax Ct. LEXIS 172">*194 Respondent, however, has taxed only the 3 per cent specified in the annuity provision, computed on the aggregate surrender values, and makes no claim for any increase in the deficiency.
While it is hence unnecessary to decide whether these were life insurance or annuity contracts, it is difficult not to be persuaded that they were the latter and not the former. Petitioner surrendered the agreements she originally held, which were undoubtedly policies of of insurance on her husband's life. She received in lieu of them agreements to pay the sums which, as we have seen, can only be characterized as annuities. It is true that the terms of the new contracts were dictated at least in most instances by the provisions of the original life insurance policies. But the amounts in question were paid under the new agreements and would not have been paid under the life insurance contracts while the latter were in force and petitioner's husband was alive.
12 T.C. 1028">*1038 Since, however, as we have said, respondent seeks to include only the 3 per cent of the consideration permitted by the second sentence in the case of payments under an annuity contract, and makes no claim for any increased deficiency, 1949 U.S. Tax Ct. LEXIS 172">*195 the same result would be reached whether we consider these annuities to have been paid under a life insurance contract or under an annuity contract.
Decision will be entered for the respondent.
Footnotes
1. (b) Exclusions from Gross Income. -- The following items shall not be included in gross income and shall be exempt from taxation under this chapter:
(1) Life Insurance. -- Amounts received under a life insurance contract paid by reason of the death of the insured, whether in a single sum or otherwise (but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income);
(2) 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. * * *↩
2. It would not apparently be unthinkable for annuity payments to be included in full. But cf. Manne v. Commissioner (C. C. A., 8th Cir.), 155 Fed. (2d) 304; Florence Mae Shelley, 10 T.C. 44. That is a solution adopted in Great Britain, which was rejected here by the Treasury out of considerations of fairness, as appears in the following excerpt from the discussion of the bill in the Senate:
"In Great Britain the whole amount of such annuities is taxed as income. It did not seem fair to the Treasury -- and this suggestion comes from the Treasury -- to tax that part of the annuity which represents the return of principal, but it did seem fair, and it seemed to the committee that it would stop a most important loophole, to tax that part of the annuity which represents interest on the capital. * * *" (Vol. 78, Cong. Rec., p. 5913.)↩