*862 Held, that under reciprocal annuity contracts purchased by the petitioner and his brother, pursuant to agreement at a time when the brothers were indebted and involved in contentions as to taxes, the petitioner is taxable upon 3 per centum of the consideration in fact paid by him for life annuities applied for by his brother, but payable to petitioner, and refund annuities contingently payable to his estate, and upon the entire amount received by the petitioner from annuity contracts transferred to him by his brother, the entire consideration paid by the petitioner for such transfer having been recovered in prior years. Sec. 22(b)(2), Revenue Act of 1938.
*456 This proceeding involves the determination of Federal income tax asserted against Moses L. Parshelsky for the calendar year 1938.
The only error assigned and relied on is that respondent erroneously increased income as reported by petitioner by the sum of $8,504.70, representing payment received from annuity contracts.
The notice of deficiency determines a deficiency of $823.36, *863 which the respondent in an amended answer seeks to increase by adding to petitioner's gross income the sum of $10,385.80, thereby increasing the deficiency in the amount of $1,607.72, making a total deficiency of $2,431.08. In the alternative, in the event there was no transfer for a valuable consideration by assignment or otherwise to the petitioner of any interest in the annuity contracts in which his brother Isaac was annuitant, respondent contends that petitioner's gross income as set out in notice of deficiency should be increased by adding thereto $1,995.30, thereby making an increased deficiency of $252.87 and a total deficiency of $1,076.23.
The question for our determination is, What is the proper amount to be included in petitioner's gross income on account of moneys received by him during the calendar year 1938 under certain refund annuity contracts described herein?
FINDINGS OF FACT.
The petitioner, Moses L. Parshelsky, is a resident of the State of New York. He filed his income tax return for the calendar year 1938 with the collector of internal revenue for the first district of New York.
*457 During the months of December 1934 and January 1935, pursuant*864 to agreement between the petitioner and his brother, Isaac Parshelsky, each applied for and received five single premium annuity contracts, in which the other was named as an annuitant and the applicant or his estate was entitled to receive the annuity payments which should become due and payable after the death of the annuitant, if the applicant survived the annuitant. The consideration paid for the contracts was $400,000, one-half of which was paid by each of the brothers. Isaac applied for and received the contracts herein below designated as Exhibits numbered 1 to 5, inclusive, and Moses applied for and received those numbered 6 to 10, inclusive.
Before and at the time of the purchase of the annuity contracts, the petitioner and his brother Isaac were indebted to the United States for income taxes and to others and knew that a jeopardy assessment of the taxes against them was being considered by the Commissioner of Internal Revenue, but did not know the amount of the taxes claimed by the Commissioner to be due and owing. Isaac Parshelsky died on March 18, 1935, before he had received any payments under any fo the refund annuity contracts and before any such payments became*865 due or payable.
Petitioner's life expectancy of March 18, 1935, under the American Annuitants Male Selected Table of Mortality, was 15.86 years. Under the American Mortality Tables it was 13.58 years.
It is stipulated, and we find, as follows:
| PAYMENTS RECEIVED BY MOSES L. PARSHELSKY ON ANNUITY CONTRACTS DURING THE YEARS 1935, 1936, 1937 AND 1938. | ||||
| Policy number | Year ended Dec. 31, 1935. | Year ended Dec. 31, 1936. | Year ended Dec. 31, 1937. | Year ended Dec. 31, 1938. |
| AN-12-507 | $1,889.25 | $1,889.25 | $1,889.25 | $1,889.25 |
| 023428 | 1,831.00 | 1,831.00 | 1,831.00 | |
| 023427 | 1,831.00 | 1,831.00 | 1,831.00 | |
| 34258 | 5,657.25 | 5,657.25 | 5,657.25 | 5,657.25 |
| 34600 | 3,771.50 | 3,771.50 | 3,771.50 | 3,771.50 |
| Total | 11,318.00 | 14,980.00 | 14,980.00 | 14,980.00 |
| AN-12-506 | 1,814.75 | 1,814.75 | 1,814.75 | 1,814.75 |
| 023425 | 1,766.00 | 1,766.00 | 1,766.00 | 1,766.00 |
| 023426 | 1,766.00 | 1,766.00 | 1,766.00 | 1,766.00 |
| 34259 | 5,426.25 | 5,426.25 | 5,426.25 | 5,426.25 |
| 34601 | 3,617.50 | 3,617.50 | 3,617.50 | 3,617.50 |
| Total | 14,390.50 | 14,390.50 | 14,390.50 | 14,390.50 |
| Grand total | 25,708.50 | 29,370.50 | 29,370.50 | 29,370.50 |
| AMOUNTS REPORTED AS INCOME FROM ANNUITIES ON 1935, 1936, 1937 AND 1938 FEDERAL INCOME TAX RETURNS FILED BY MOSES L. PARSHELSKY. | ||||
| Policy number | Year ended Dec. 31, 1935. | Year ended Dec. 31, 1936. | Year ended Dec. 31, 1937. | Year ended Dec. 31, 1938. |
| AN-12-507 | $750.00 | $750.00 | $750.00 | |
| 023428 | 750.00 | 750.00 | ||
| 023427 | 750.00 | 750.00 | ||
| 34258 | 2,250.00 | 2,250.00 | 2,250.00 | |
| 34600 | 1,500.00 | 1,500.00 | 1,1500.00 | |
| Total | 4,500.00 | 6,000.00 | 6,000.00 | |
| AN-12-506 | 750.00 | 750.00 | ||
| 023425 | 750.00 | 750.00 | $750.00 | |
| 023426 | 750.00 | 750.00 | 750.00 | |
| 34259 | 2,250.00 | 2,250.00 | ||
| 34601 | 1,500.00 | 1,500.00 | ||
| 6,000.00 | 6,000.00 | 1,500.00 | ||
| Grand total | 10,500.00 | 12,000.00 | 6,000.00 | 1,500.00 |
*866 *458 The annuity contracts were all single premium contracts and no further sum or consideration than the amounts heretofore stated, $200,000 by each of the brothers, was at any time paid by either the petitioner or his brother Isaac for the contracts or any interest therein.
By virtue of the agreement between the two brothers and with the insurance companies issuing the contracts or policies, the broter (and his estate) living after the death of the other was entitled to receive the annuity (called refund annuity) theretofore received by the annuitant dying.
The following table shows the parts of the entire consideration which were charged and paid under each of the said contracts on account of its provision for the payment of a life annuity and on account of its provision for the payment of refund annuities after the death of the annuitant and, as to the refund annuities, that part of the consideration charged and paid for the undertaking to make such refund annuity payments to the beneficiary or his estate in the event the beneficiary survived the annuitant, and that part of the consideration charged and paid for the undertaking to make such refund annuity payments*867 to the estate of the annuitant in the event the beneficiary did not survive the annuitant:
| Consideration for refund annuities | ||||||
| Exhibit No. | Contract No | Total Consideration | Consideration for life annuity | Total | For payments to beneficiary if he survive or his estate | For pay ments to annuitant's estate if beneficiary does not survive |
| (1) | (2) | (3) | (4) | (5) | ||
| Applied for by Isaac Parshelsky: | ||||||
| 1 | 34258 | $75,000 | $64,311.62 | $10,688.38 | $9,358.93 | $1,329.45 |
| 2 | 34600 | 50,000 | 42,874.41 | 7,125.59 | 6,239.29 | 886.30 |
| 3 | AN 12507 | 25,000 | 21,425.61 | 3,574.39 | 3,130.42 | 443.97 |
| 4 | 023427 | 25,000 | 20,765.00 | 4,235.00 | 3,722.32 | 512.68 |
| 5 | 023428 | 25,000 | 20,765.00 | 4,235.00 | 3,722.32 | 512.68 |
| Total | 200,000 | 170,141.64 | 29,858.36 | 26,173.28 | 3,685.08 | |
| Applied for by the petitioner: | ||||||
| 6 | 34259 | 75,000 | 65,226.24 | 9,773.76 | 8,308.67 | 1,465.09 |
| 7 | 34601 | 50,000 | 43,484.16 | 6,515.84 | 5,539.12 | 976.72 |
| 8 | AN 12506 | 25,000 | 21,715.84 | 3,284.16 | 2,794.18 | 489.98 |
| 9 | 023425 | 25,000 | 21,084.63 | 3,915.37 | 3,352.90 | 562.47 |
| 10 | 023426 | 25,000 | 21,084.63 | 3,915.37 | 3,352.90 | 562.47 |
| Total | 200,000 | 172,595.50 | 27,404.50 | 23,347.77 | 4,056.73 |
*459 *868 Isaac Parshelsky transferred to the petitioner by assignment or otherwise for a total consideration of $26,173.28 paid by the petitioner, interests in the annuity contracts, Exhibits 6, 7, 8, 9, and 10, by virtue of which interest the petitioner received in the years prior to 1938, sums in excess of the actual value of such consideration and the amount of the premiums and sums subsequently paid by the petitioner, and by virtue of which interest the petitioner received in the year 1938, $14,390.50.
The contracts which are Exhibits numbered 1, 2, 6, and 7, were issued by the Mutual Life Insurance Co. and each contains the following provision:
Neither this Contract nor any benefits accruing hereunder shall be transferable by said Annuitant or subject to commutation, anticipation or encumbrance by said Annuitant.
Contracts which are Exhibits 4, 5, 9, and 10, were issued by the John Hancock Mutual Life Insurance Co. and each contains the following provision:
In accordance with the request of the applicant it is hereby agreed that, except so far as may be contrary to the laws of any State having jurisdiction in the premises, the Annuitant and/or the beneficiary hereunder shall have*869 no right to assign, transfer, hypothecate, encumber, commute or anticipate his interest in any payments under this contract unless otherwise provided in this contract, and that payments under this contract shall not in any way be subject to any legal process to levy upon or attach the same for payment of any claim against the Annuitant and/or the beneficiary. It is hereby further agreed *460 that no loan shall be made and the cash surrender value shall not be paid under this contract, except upon the joint request of the annuitant and purchaser.
Contracts which are numbered Exhibits 3 and 8, were issued by the Aetna Life Insurance Co. and each contains the following provision:
In accordance with Sec. 4193 of the General Statutes of Connecticut, Revision of 1930, providing that "any domestic life insurance company shall have power to hold the proceeds of any policy issued by it under a trust or other agreement upon such terms and restrictions as to revocation by the policyholder and control by beneficiaries and with such exemptions from the claims of creditors of beneficiaries other than the policyholder as shall have been agreed to in writing by such company and the policyholder" *870 it is hereby agreed between the company and Isaac Parshelsky (the policyholder and purchaser of this annuity policy) that the annuity payments hereunder shall, prior to actual payment thereof, be held by the company free from claims of creditors of the annuitant, Moses Parshelsky, and from legal process to levy upon or attach the same for payment thereof, and that said annuitant shall not have the right to assign, anticipate, alienate or commute said proceeds or any part thereof, or any right, title or interest therein.
The consideration paid by each brother in substance paid for the contracts applied for and issued to his brother.
OPINION.
DISNEY: The petitioner and his brother each invested $200,000 in contracts of annuity. The petitioner applied for and received contracts known as Exhibits 6 to 10 and his brother applied for and received contracts known as Exhibits 1 to 5. This was done by agreement. Each made his brother annuitant, with himself and his estate beneficiary or remainderman if he survived the brother. The cost of the annuity for life, the refund annuity (annuity payable after annuitant's death) to petitioner, and to the brother dependent upon survival, *871 is shown by the evidence.
In the taxable year the petitioner received from contracts 1 to 5 the sum of $14,980 and from contracts 6 to 10 the sum of $14,390.50. The question is to what extent such sums constitute taxable income.
The respondent, having asked for an increased deficiency, has the burden of proof in that respect. He argues, in effect, that, though each brother appears as applicant for the contracts which name his brother as annuitant and himself as beneficiary, if he survive, looking to substance it appears that in fact each brother purchased those contracts in which he is annuitant and his estate a contingent remainderman; that therefore the $200,000 paid by the petitioner is to be considered paid for the different privileges conferred by the contracts in the proportions which nominally those privileges cost the brother; that out of the $200,000 paid, petitioner in substance paid $170,141.64 for the annuity for himself, $3,685.08 for the right *461 in his estate to receive payment after his death if he survive the beneficiary-brother, and $26,173.28 for the right of the beneficiary-brother (or his estate) to receive payment if he survive the petitioner; *872 that the latter right, so costing $26,173.28, was reciprocal with, and in effect exchanged for, the same right in the contracts purchased nominally by petitioner but in substance by his brother, and that therefore his brother transferred that right to him, within the intendment of section 22(b)(2), Revenue Act of 1938. 1 Respondent therefore argues that, since the petitioner survived his brother and received the payments, he received them under a "transfer" and must be taxed upon the full amount ($14,390.50) received in that respect in the taxable year, since prior thereto he had received from the contracts more than the consideration paid for that right, i.e., the $26,173.28 paid for the reciprocal right under the contracts in fact purchased by him; and, finally, as to the $14,980 received upon annunities, that under section 22(b)(2), supra, as to tax upon annuities, the petitioner is taxable upon 3 percent of the amounts paid for the right of the petitioner and his estate to the payments to be received if he survived the brother. That amount should be $6,000, he argues, because the whole $200,000 was paid for the contracts in general, and the tax should not be diminished because*873 only $170,141.64 was in a sense applicable to the annuity.
*874 To this theory the petitioner in effect replies that it is not shown that petitioner purchased in substance the contracts applied for and received by his brother, but that each paid for what he applied for and received; that petitioner invested $200,000 in the contracts and, therefore, there being no "transfer" but only annuities, the maximum tax should be 3 percent of $200,000 or $6,000; or, if the tax should be laid upon the cost of the contracts purchased by his brother, that there was no possibility of profit in three of the contracts purchased *462 by himself and, the other two not being straight annuities, no tax is due on more than the five contracts purchased by the brother. The petitioner argues that no evidence establishes any reason why each of the brothers should be considered to have purchased the contracts applied for by the other. He challenges respondent's view that the difficulties of the two brothers with creditors, and the Government as to unpaid income taxes, and provisions in the contracts for escape of the proceeds of such contracts from liability to creditors, offer proof that there was such reciprocal purchase of the contracts.
*875 The respondent, in the alternative, contends that if it be considered that there was no "transfer" within the language of section 22(b)(2), then the tax should be laid upon 3 percent of the entire consideration, $400,000 paid by both brothers, on the theory that the Act of 1938, different in that respect from earlier law, does not limit the tax to consideration paid by the recipient of the annuity. , is cited as authority.
Disposing first of the alternative, we do not find in the case last cited sufficient authority to bear out respondent's view. It is true that there the 3 percent was computed upon consideration paid by another, but the present question was not considered. The question there posed was that of constitutionality. Therefore we do not think the answer to the present question would be well based upon that opinion. Though there is some indication in committee reports that the statute enacted in 1938 is not intended to limit the consideration to be considered in fixing the amount taxable, to that paid by the transferee, the conclusion to which we have come renders it unnecessary to consider the effect*876 of the statutory expression in that regard.
After much consideration of this novel and interesting question, we have arrived at the conclusion that the petitioner must be considered as the purchaser of the contracts which his brother applied for and received, but that the whole $200,000 consideration can not be applied to the annuities purchased, only $173,826.62 (amount paid for annuity $170,141.64 plus $3,685.08 paid for right of annuitant's estate to payments) being the basis for 3 percent taxed against annuities, and that the remainder, or $26,173.28 must be considered the consideration paid for a transfer, by petitioner's brother, of the right ot receive payment upon survival of the brother.
We find, in the difficulties and investigations as to taxes, the existence of creditors, and the provisions as to liability of the contracts to levy by creditors, reason for the "crossing" or reciprocity in the contracts. The contracts issued by the Mutual Life Insurance Co. provide partial escape from creditors in the prohibition of encumbrance, transfer, or anticipation by the annuitant. Those issued by the John Hancock Mutual Life Insurance Co. recite an agreement "in accordance*877 with *463 the request of the applicant" that there shall, except in so far as contrary to state law, be no right in either annuitant or beneficiary to assign or encumber and that payment shall not be subject to levy against either. That this agreement is made upon request of the applicant shows that each brother had in mind the escape from creditors. The two contracts issued by the Aetna Life Insurance Co., one upon the application of each brother, each provides against levy by creditors of the annuitant, and against assignment, anticipation, or commutation by the annuitant. The provision indicates that it was by agreement with the applicant. The annuitant's interest was the prime interest, in a sense, in each contract. Clearly these contracts were reciprocal, for a like consideration paid by each brother for the other's benefit, and did not constitute gifts from either to the other. In our opinion the contracts were intentionally crossed, or purchased in the name of the brother by mutual agreement, and that petitioner in substance and fact purchased those applied for by his brother. *878 ; ; . We therefore hold that the petitioner's tax should be computed upon a basis of 3 percent of the "annuity" rights. It is clear that that term as used in section 22(b)(2) includes those rights arising after the death of the annuitant, whereby his estate, if he has survived the beneficiary, receives payment, for it is defined as "an allowance or payment from the income of a fund at specific periods and during a prescribed term." , quoting . Obviously the etymology of the word, from "annus" or year, indicates that its application is not limited to a life or lives. We are of the opinion that the 3 percent is to be computed on all of the $200,000 consideration paid by the taxpayer, except the amount that was paid for a "transfer" under the statute. To apply the 3 percent to the full $200,000 would be duplication. We hold that therefrom $26,173.28 was paid for a transfer*879 from petitioner's brother. The petitioner, because he survived his brother, received $14,390.50 from the contracts in substance paid for by his brother. He received such right because of the provision, in the contracts in substance paid for by him, for a reciprocal right in the brother had he survived. Thus there was receipt of payment by him because of transfer of the contract to him. . The evidence shows that more than the amount of the consideration had been recovered prior to the taxable year. Therefore, under the latter portion of section 22(b)(2), the entire $14,390.50 was taxable to the petitioner in the year here involved.
*464 The petitioner argues that under some of the contracts the petitioner can not recover more than the amount invested and therefore that section 22(b)(2) should not be applied. We find no such distinction indicated in the statute. The amounts are annuities, in one case a transfer. We see no sound reason for not applying the statute as written.
Reviewed by the Board.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 22. GROSS INCOME.
* * *
(b) EXCLUSIONS FROM GROSS INCOME. - The following items shall not be included in gross income and shall be exempt from taxation under this title:
* * *
(2) ANNUITIES, ETC. - Amounts received (other than amounts paid by reason of the death of the insured and interest payments on such amounts ans 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 consideraton 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 frold gross income under this title 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. ↩