Opinion
Docket No. 51338.
1955-10-31
PHIL L. ZIMMERMANN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Bertram W. Tremayne, Jr., Esq., for the petitioner. Richard C. McLaughlin, Esq., for the respondent.
A $3,000 payment was made to petitioner in 1951 out of a fund comprised of the surrender value of an endowment contract and an annuity contract and accumulated interest thereon. The payment was made pursuant to an agreement whereby the insurance company retained the fund at interest of not less than 3 per cent on the unpaid balance, distributed to petitioner $3,000 per annum, and reserved to petitioner the right to withdraw all or part of the unpaid balance at any time. The amount of interest credited to the account in 1951 was $2,955.03. Held, the payment was not exempt from taxation under section 22(b) (2)(A), Internal Revenue Code of 1939, but was taxable to the extent of the interest credited under section 22(a). Bertram W. Tremayne, Jr., Esq., for the petitioner. Richard C. McLaughlin, Esq., for the respondent.
Respondent determined a deficiency in the income tax of petitioner for the calendar year 1951 in the amount of $1,523.38. Petitioner does not contest two of the adjustments reflected on the statement attached to the notice of deficiency, but one of those adjustments depends on the final decision with respect to the adjustment in dispute. The issue for decision is whether the respondent correctly determined that a payment to petitioner by the Massachusetts Mutual Life Insurance Company was includible in petitioner's gross income to the extent of the interest credited to his account in that year in the amount of $2,955.03.
FINDINGS OF FACT.
All of the facts are stipulated and are so found.
Petitioner resides in the County of St. Louis, Missouri, and filed his individual income tax return for the calendar year 1951 with the collector of internal revenue for the first district of Missouri.
On or about October 4, 1924, petitioner purchased a single premium endowment policy, No. 669410, from the Massachusetts Mutual Life Insurance Company (hereinafter referred to as the Company or the Insurance Company), for which the sum of $49,999.86 was paid by petitioner at the time of issuance. The policy states that the sum of $55,331 was payable either to petitioner on September 30, 1929, if living, or at the prior death of the petitioner, to the beneficiary named in the policy. The petitioner could elect, with the right of revocation, to have the proceeds of the policy payable according to any one of four options rather than in a lump sum. Option B provides for the payment of equal periodical installments for a fixed period of time and Option C provides for the payment of a life annuity. Options A and D provide for the disposition of the proceeds of the policy, as follows:
Option A. Equal installments, each of such an amount as may be elected, to continue until the proceeds, together with the interest herein specified, are exhausted; provided, that the final installment shall be for the balance only of said proceeds and specified interest. On each anniversary of the first installment interest at not less than three per cent per annum will be added to the unpaid balance of said proceeds.
Option D. The proceeds of this policy, or any part thereof, may be left with the Company, and the Company will pay interest thereon at such rate, not less than three per cent, as may be determined by the directors. The amount left may be withdrawn as shall be agreed upon with the Company in the election of this option.
The policy also provides:
The cash surrender value of this policy and of any outstanding paid-up additions, together with any dividend accumulations, may be paid according to any one of the above Options.
On or about April 26, 1927, petitioner purchased a discounted single premium deferred annuity policy, No. 790720, from the Insurance Company, for which petitioner paid the sum of $10,000 at the time of issuance. The policy provided for the payment to petitioner of an annuity of $674.60 per month for life, or for 10 years certain, beginning April 19, 1969, if he should be living at that time. The policy also provided that petitioner could take $70,160 in a lump sum in lieu of the annuity if living on April 19, 1969, and further provided that the premium would be returned if he should die prior to that date. On March 29, 1930, the policy was amended to allow petitioner to elect, with right of revocation, to have the maturity or cash surrender value paid in accordance with any one of the above four options.
On or about September 30, 1925, petitioner elected, with right of revocation, to have the then cash surrender value of policy No. 669410, in the amount of $51,065.53, paid to him in annual installments of $1 under Option A and said election remained in effect until May 29, 1933.
On or about April 30, 1931, petitioner elected, with right of revocation, to have the then cash surrender value of policy No. 790720, in the amount of $11,913.11, paid to him in annual installments of $1 under Option A and said election remained in effect until May 29, 1933.
Following the above elections no insurance risks whatsoever were involved.
On May 28, 1933, petitioner had a credit balance of $87,389.93 with the Company, computed as follows:
+-------------------------------------------------------------------+ ¦ ¦No. 669410¦No. 790720¦Total ¦ +------------------------------------+----------+----------+--------¦ ¦Proceeds at time of initial election¦$51,065.53¦$11,913.11¦$62,978.¦ +------------------------------------+----------+----------+--------¦ ¦Interest credited to May 28, 1933 ¦23,133.26 ¦1,289.03 ¦24,422. ¦ +------------------------------------+----------+----------+--------¦ ¦Totals ¦$74,198.79¦$13,202.14¦$87,400.¦ +------------------------------------+----------+----------+--------¦ ¦Less: Annual withdrawals ¦8.00 ¦3.00 ¦11. ¦ +------------------------------------+----------+----------+--------¦ ¦Balance May 28, 1933 ¦$74,190.79¦$13,199.14¦$87,389.¦ +-------------------------------------------------------------------+
Under the terms of an agreement dated May 29, 1933, between petitioner and the Company the petitioner elected, with right of revocation, to receive monthly installments of $337.36, as provided in Option A of said policies, and said election remained in effect until May 28, 1934.
Petitioner and the Company entered into a ‘Supplemental Agreement’ dated May 28, 1934, which provided in part as follows:
THIS AGREEMENT, made at Springfield, Massachusetts, this twenty-eighth day of May 1934, between the Massachusetts Mutual Life Insurance Company of Springfield, Massachusetts, party of the first part, and Philip L. Zimmermann of St. Louis, Missouri, party of the second part.
WITNESSETH, WHEREAS, on the 29th day of May 1933 the said parties entered into a written agreement concerning the proceeds of the total cash surrender value of Policies Nos. 669410 and 790720, dated September 30, 1924 and April 19, 1927 respectively, issued by said party of the first part on the life of said party of the second part, and
WHEREAS said agreement of May 29, 1933 provided that said party of the second part should have the right to revoke or modify the provisions of said agreement, and
Now, at the request of the said Philip L. Zimmermann, party of the second part, the said agreement of May 29, 1933 is hereby revoked and declared to be null and void and the said party of the first part fully discharged and released under said agreement.
NOW, THEREFORE, in consideration of the premises, it is hereby agreed that the proceeds of said total cash surrender value, amounting to $87,389.99 on May 28, 1934, are retained by said party of the first part and shall be payable, at the Home Office of said party of the first part in Springfield, Massachusetts, in annual installments of $5.00, as provided in Option ‘A’ of the policies, beginning May 28, 1934, to Edythe Dixie Zimmermann, wife of said party of the second part, * * *
It is further agreed that said party of the second part, during his lifetime, shall have the right to withdraw the whole or any part of the funds retained by said party of the first part, and the further right, with the assent of said party of the first part, to modify or revoke the provisions of this agreement.
On May 28, 1938, petitioner's account with the Company reflected a credit balance of $100,000, computed as follows:
+-------------------------------------+ ¦Balance, as of May 28, ¦$87,389.93¦ ¦1933 ¦ ¦ +-------------------------------------+
May 28, 1933 to May 28, 1934 May 28, 1934 to May 28, 1938 Interest $4,048.38 $14,595.58 18,643.96 credits Total $106,033.89 Less: 4,048.32 1 1,985.57 6,033.89 Withdrawals Balance May $100,000.00 28, 1938
On May 26, 1938, petitioner requested that the supplemental agreement of May 28, 1934, be amended to provide that
The proceeds of the policies, amounting to $100,000.00 on May 28, 1938, shall be retained by said party of the first part, as provided in Option ‘D’ of the policies, and interest thereon paid annually, at such rate, not less than three per cent per annum, as may be determined by the Board of Directors of said party of the first part, beginning May 28, 1939, to said party of the second part.
The Company complied, paying petitioner $3,750 on May 28, 1939, and $3,600 on May 28, 1940.
On May 15, 1940, petitioner requested that the amendment of May 26, 1938, be canceled and that the supplemental agreement of May 28, 1934, be further amended to provide that
The proceeds of the policies, amounting to $100,000.00 on May 28, 1940, shall be payable in annual installments of $3000.00, as provided in Option ‘A’ of said policies, beginning May 28, 1940, to said party of the second part, if living as said installments respectively fall due.
The amendments did not affect petitioner's right to withdraw all or part of the funds at any time. The petitioner did not attempt to further amend the agreement until after the taxable year in question. All of the above contracts, agreements and amendments thereto, specified the manner in which the unpaid balance was to be distributed upon the death of the petitioner. In compliance with the requested amendment of May 26, 1940, at the end of the anniversary date in each of the years 1940 to 1951, inclusive, there were withdrawals, interest credits and balances in petitioner's account as follows:
+-----------------------------------------------------------------------+ ¦ ¦ ¦Interest ¦ ¦ +------------------------------------+-----------+----------+-----------¦ ¦At end of anniversary date of May 28¦Withdrawals¦credits ¦Balance ¦ +------------------------------------+-----------+----------+-----------¦ ¦1940 ¦ ¦ ¦$100,000.00¦ +------------------------------------+-----------+----------+-----------¦ ¦1940 ¦$3,000 ¦ ¦97,000.00 ¦ +------------------------------------+-----------+----------+-----------¦ ¦1941 ¦3,000 ¦$3,492.00 ¦97,492.00 ¦ +------------------------------------+-----------+----------+-----------¦ ¦1942 ¦3,000 ¦3,412.22 ¦97,904.22 ¦ +------------------------------------+-----------+----------+-----------¦ ¦1943 ¦3,000 ¦3,181.89 ¦98,086.11 ¦ +------------------------------------+-----------+----------+-----------¦ ¦1944 ¦3,000 ¦3,187.80 ¦98,273.91 ¦ +------------------------------------+-----------+----------+-----------¦ ¦1945 ¦3,000 ¦3,193.90 ¦98,467.81 ¦ +------------------------------------+-----------+----------+-----------¦ ¦1946 ¦3,000 ¦3,200.20 ¦98,668.01 ¦ +------------------------------------+-----------+----------+-----------¦ ¦1947 ¦3,000 ¦2,960.04 ¦98,628.05 ¦ +------------------------------------+-----------+----------+-----------¦ ¦1948 ¦3,000 ¦2,958.84 ¦98,586.89 ¦ +------------------------------------+-----------+----------+-----------¦ ¦1949 ¦3,000 ¦2,957.61 ¦98,544.50 ¦ +------------------------------------+-----------+----------+-----------¦ ¦1950 ¦3,000 ¦2,956.34 ¦98,500.84 ¦ +------------------------------------+-----------+----------+-----------¦ ¦1951 ¦3,000 ¦2,955.03 ¦98,455.87 ¦ +------------------------------------+-----------+----------+-----------¦ ¦Totals ¦$36,000 ¦$34,455.87¦ ¦ +-----------------------------------------------------------------------+
The installment of $3,000 received by petitioner in 1951, when added to all installments actually paid to him prior to 1951 from the proceeds of said policies of insurance, did not exceed the total premiums or consideration paid.
For each of the years prior to 1951, but not for the year 1951, petitioner included in gross income the amount of interest added by the Company to the unpaid proceeds of said policies. Petitioner has filed claims for refund applicable to the years 1948, 1949, and 1950, in which he claimed that the interest so added was erroneously included by him in gross income. Said claims for refund have been disallowed and petitioner has filed suit in the United States District Court for the Eastern Division of the Eastern District of Missouri for refund of income taxes attributable to the inclusion of said amounts in gross income.
On or about April 23, 1952, supplemental agreement dated May 28, 1934, was amended to provide that beginning May 28, 1952, the annual installment payable be increased from $3,000 to $5,000, which amendment is still in force and effect.
Respondent determined that petitioner realized taxable income in 1951 to the extent of the interest credited to his account in that year in the amount of $2,955.03.
The payment received in 1951 was not an annuity payment; nor was it an amount received under a life insurance or endowment contract.
OPINION.
BRUCE, Judge:
Petitioner received a $3,000 payment from the Insurance Company in 1951 out of a fund comprised of the total surrender values of an endowment contract and an annuity contract and accumulated interest thereon. Interest on the fund in the amount of $2,955.03 had been credited to petitioner's account in that year. The parties are agreed that the payment was not taxable as an annuity under the second sentence of section 22(b)(2)(A) of the Internal Revenue Code of 1939.
George H. Thornley, 2 T.C. 220, reversed on another issue (C.A. 3) 147 F.2d 416. Petitioner contends, however, that the payment was exempt from taxation under the first sentence of section 22(b)(2)(A). That sentence provides for the exclusion from gross income of ‘Amounts received * * * under a life insurance or endowment contract’ until the total amounts received exceed the aggregate premiums or consideration paid. As is stated in Burtha M. Fisher, 12 T.C. 1028, 1037, aff'd. (C.A. 6) 181 F.2d 1010, ‘It eliminates from the ‘broad sweep’ of section 22(a) the amounts therein described.' Respondent contends, on the other hand, that section 22(b)(2)(A) does not apply and that the payment is taxable under section 22(a) to the extent of the interest credited to petitioner's account, citing J. Giltner Igleheart, Sr., 10 T.C. 766, aff'd. (C.A. 7) 174 F.2d 605.
On May 24, 1938, taxpayer withdrew $1,960.57, which, when added to the annual $5 withdrawals aggregating $25, equals the total of $1,985.57.
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 chapter:(2) ANNUITIES, ETC.(A) In General.— 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. The exclusion from gross income and exemption from taxation of amounts received under an annuity contract until the aggregate premiums or consideration paid have been recovered was eliminated by the Revenue Act of 1934 which amended the predecessor of section 22(b)(2)(A).
The question is whether the $3,000 was an amount received ‘under a life insurance or endowment contract’ which, when added to amounts previously received under said contract, did not exceed the aggregate premiums or consideration Aid. In our opinion no part of the $3,000 was received under a life insurance or endowment contract. In the first place policy No. 790720 was neither a life insurance nor an endowment contract, but was an annuity contract, Burtha M. Fisher, George H. Thornley, both supra. An amount, other than an annuity, received under an annuity contract does not fall within the provisions of section 22(b)(2)(A), Internal Revenue Code of 1939.
Cf. Burtha M. Fisher, supra. In the second place while policy No. 669410 was a typical endowment contract,
the amount in question was not received under that contract.
Carr v. Hamilton, 129 U.S. 252, 253; Silen v. Silen, 44 Wash.2d 884, 271 F.2d 674, 676 (June 21, 1954); Bankers' Life & Loan Association, (Tex. Civ. App.) 114 S.W.2D 374, 376; Union Central Life Insurance Co. of Columbus, Ohio, 171 Okla. 250, 42 P.2d 831, 833; State v. Federal Investment Co., 48 Minn. 110, 50 N.W. 1028.
The endowment contract policy was surrendered in September 1925, approximately 11 months after it was purchased, and at all times thereafter the cash surrender value, which exceeded the premium paid, was left on deposit with the Company at interest of not less than 3 per cent. Petitioner could withdraw the entire unpaid balance at any time. Until May 29, 1933, he elected to have only one dollar per year paid to him. On the latter date he entered into an agreement with the Company whereby the unpaid balance was combined with the unpaid balance on policy No. 790720 and the payments were increased to $337.36 per month. That agreement was revoked and another was entered into dated May 28, 1934, whereby the payments were reduced to $5 per annum payable to petitioner's wife. On May 31, 1938, the agreement of May 28, 1934, was amended to provide that all of the interest would be paid to petitioner. On May 15, 1940, the agreement was amended again to provide that $3,000 per annum, rather than all of the interest, would be paid to petitioner. Accordingly, $3,000 was paid to petitioner on May 28, 1940,
and on May 28 of each of the following years, including 1951.
On May 28, 1940, petitioner also received, under the 1938 amendment, $3,600 representing the interest earned for the year ending on that date.
Respondent argues that the endowment contract terminated when it was surrendered, citing C.J.S., Insurance, secs. 459, 460(b). ‘To ‘surrender’ means to cancel or yield up' (Well v. Vermont Life Insurance Co., 28 Ind. App. 620, 63 N.E. 578); and there may be considerable merit in respondent's argument. Cf. Burtha M. Fisher, supra; Constance C. Frackelton, 46 B.T.A. 883; Blum v. Higgins, 57 F.Supp. 140, aff'd. (C.A. 2) 150 F.2d 471. See also Clarence B. Jones, 22 T.C. 407, revd. (C.A. 7) 222 F.2d 891; Law v. Rothensies, 57 F.Supp. 447, 450; George H. Thornley, supra (dissenting opinion). However, it is unnecessary to decide that question. The payment here involved was made pursuant to the second amendment to an agreement or contract executed in 1934 which bore no actual contractual relationship to the endowment contract. Regardless of the transaction which terminated the endowment contract, we think it is clear that it no longer existed at the time of the 1940 amendment to the 1934 agreement and that payments made pursuant to the 1934 agreement as amended were not amounts received under the endowment contract.
Cases involving section 22(b)(1) cited by petitioner are not in point. In addition petitioner cites I.T. 4029, 1950-2 C.B. 17, revoking I.T. 3402, 1940-2 C.B. 57, and modifying I.T. 3202, 1938-2 C.B. 138, in accordance with the recommendations contained in G.C.M. 26595, 1950-2 C.B. 16. I.T. 4029 is also distinguishable; one reason being that it applies only to ‘periodical installments received for a fixed period of time.'
But cf. I.T. 3963, 1949-2 C.B. 36, which would tax the excess over the premiums paid at the time the policy matures or is surrendered even where the insured elects, on or after maturity or surrender, to receive the proceeds in periodical installments for a fixed period of time. See also Rev. Rul. 264, 1954-2 C.B. 57.
Since section 22(b) is not applicable, the amount involved is includible in gross income if taxable under the ‘broad sweep’ of section 22(a). Burtha M. Fisher; J. Giltner Igleheart, Sr., both supra. Essentially, petitioner had a fund on deposit with the Company earning interest of not less than 3 per cent. Under his contract he had ‘the right to withdraw the whole or any part of the funds' at any time and in fact withdrew $3,000 in 1951. As in the case of a savings deposit, the interest credited in the amount of $2,955.03 was taxable under section 22(a) and was properly included in petitioner's gross income by respondent. Wm. Fleming, 24 T.C. 818.
Decision will be entered for the respondent.