Hommel v. Commissioner , 7 T.C. 992 ( 1946 )

Bella Hommel, Petitioner, v. Commissioner of Internal Revenue, Respondent

Hommel v. Commissioner

Docket No. 7501

United States Tax Court

7 T.C. 992; 1946 U.S. Tax Ct. LEXIS 56;

October 17, 1946, Promulgated

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Decision will be entered for the petitioner.

Separate agreements under which each of her four children agreed to make future payments to the petitioner during her lifetime were made in consideration of the transfer of certain shares of stock by petitioner to each of such children. No payments were received by petitioner during the year in which the agreements were made, the taxable year. Held, on the evidence, petitioner realized no taxable gain for the taxable year, whether the transaction be treated as the purchase of an annuity by petitioner and so taxable under section 22 (b) (2), I. R. C., or as a sale or exchange of securities and so taxable under section 111 (a) and (b), since the fair market value of the annuity agreements when received by petitioner in the taxable year did not exceed her basis for the securities sold or exchanged. See J. Darsie Lloyd, 33 B. T. A. 903; Frank C. Deering, 40 B. T. A. 984.

A. Leo Weil, Jr., Esq., for the petitioner.

Homer Benson, Esq., for the respondent.

Leech, Judge.

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LEECH

Respondent determined a deficiency in income tax in the amount of $ 2,261.55 against petitioner for the taxable year 1941. On December 9 of that year the petitioner transferred certain securities to each of her four children in exchange for their separate written promises to pay the petitioner an annuity for her lifetime. Respondent treated this transaction as taxable under section 111 (a) and (b) of the Internal Revenue Code, by ascribing a "fair market value" of one-fourth of the aggregate fair market value of all of the securities at the time of the transfer, to the promises of each of the four children. In addition, in computing the deficiency, respondent broke down each of the four contracts and treated the transfer of each security therein as being a separate transaction and, in so doing, determined that losses were sustained on some of such separate transfers and thus to be disregarded under section 24 (b) of the code, while on others a gain was realized and so taxable under section 111 (b), supra. Petitioner contests the propriety of both of these actions, thus raising the only two issues for decision.

FINDINGS OF FACT.

The petitioner filed her return for the taxable year 1941 with the collector of internal revenue for the twenty-third district of Pennsylvania, at Pittsburgh, Pennsylvania.

On December 9, 1941, the petitioner transferred to each of her four children certain securities, in consideration of each of the four children agreeing to pay to the petitioner during her life the annual sum of $ 2,132, commencing with the year 1942.

A separate annuity agreement was thereupon entered into between petitioner and each of her four children, and the securities transferred to each of the children were set forth on exhibits attached to each of the annuity agreements.

The amount of the annuity payable by each of the children, as provided in their respective annuity agreements, was determined on the basis of the annuity payment offered by companies engaged in the business of writing annuity contracts.

At the time of the execution of all of these agreements, each of the four children of petitioner who were parties thereto was the possessor of property of his own and had an independent income.

Under the terms of the annuity agreements, the agreement was to remain in full force and effect during the lifetime of the petitioner and, during her lifetime, was binding on the heirs, executors, administrators, and assigns of the petitioner's four children.

No payments were due or paid to petitioner in 1941, pursuant to the terms of the annuity agreements, the first payment under each agreement being due and payable in 1942.

Pursuant to the terms of the agreements, petitioner received the sum of $ 2,132 from each of her four children in 1942, or total receipts of $ 8,528 in that year.

The cost or other basis to petitioner of the securities exchanged for the respective annuity contracts was $ 102,223.78, and these securities had a total fair market value of $ 96,768.52 as of December 9, 1941.

The fair market value of the securities transferred to each child under each annuity agreement was approximately $ 24,192.13.

Respondent treated the transaction as a sale by petitioner of the several specified securities to each of her four children. In so doing he disallowed all losses, under section 24 (b) of the code, but recognized short term capital gains in the amount of $ 172 and long term capital gains in the amount of $ 5,076.98.

OPINION.

Since both parties have obviously assumed the fact, we also assume from the record, as an entirety, that petitioner was on the cash basis.

Thus, if the transaction is to be treated as being a sale of securities, as both parties have done, since petitioner received no cash therefrom in the taxable year, her gain must be limited to the amount by which the fair market value of the annuity contracts when received exceeded her basis for the securities sold. Sec. 111 (a) and (b), I. R. C. That basis to petitioner was $ 102,223.78. The obligors on the annuity contracts were all individuals. They were not "a sound insurance company." But the terms of the annuity agreements were computed on the same basis as similar contracts of companies in the business of writing annuity contracts. The then fair market value of the securities transferred for the annuities was less than the basis of the securities to petitioner, by about $ 6,000. Petitioner argues, in effect, that when she received the annuity contracts in the taxable year, they were without fair market value as a matter of law. Whether this is so, we do not decide. In any event under the present circumstances, we think, such fair market value, as a matter of fact, did not exceed her basis for the securities she exchanged for the annuities. See J. Darsie Lloyd, 33 B. T. A. 903; Frank C. Deering, 40 B. T. A. 984; Burnet v. Logan, 283 U.S. 404">283 U.S. 404;Bedell v. Commissioner, 30 Fed. (2d) 622; Evans v. Rothensies, 114 Fed. (2d) 958; Cassatt v. Commissioner, 137 Fed. (2d) 745. And no taxable gain resulted.

On the other hand, if, despite the treatment accorded these agreements by both parties, the transaction be considered a purchase of an annuity by petitioner, the same conclusion must follow, since petitioner received nothing from the contracts in the taxable year. Sec. 22 (b) (2), I. R. C.; Frank C. Deering, supra. Respondent is reversed.

Decision will be entered for the petitioner.