Petition for Review from the United States Board of Tax Appeals.
Before BUFFINGTON and BIGGS, Circuit Judges, and DICKINSON, District Judge.
Upon January 5, 1928, the petitioning taxpayer applied to Sun Life Assurance Company of Canada for an agreement. This application was titled an "Application for a Life Annuity with Death Benefit." The amount of "death benefit" sought by it was $50,000. The sum of the "premium" was designated as $52,500, and the applicant desired an "annuity" to be paid to him monthly beginning upon February 9, 1928. The application set forth that the "death benefit" was to be paid to Fidelity-Philadelphia Trust Company, as trustee.
Upon January 7, 1928, the premium in the sum specified was paid by the taxpayer to the insurance company and a formal contract, agreement or policy was entered into and issued by the company to the taxpayer. This agreement or policy provided that the company would pay to the taxpayer $145.83 upon the ninth day of February, 1928, " * * * if the said annuitant be then alive and a like monthly payment on the ninth day of each succeeding month thereafter, during the subsequent lifetime of the said annuitant * * * ." The agreement also provided that $50,000 as "the principal sum" with " * * * a proportionate part of the annuity payment for the fractional period between the date on which the last annuity payment becomes due and the date of the death of the annuitant * * * ", or a sum equivalent to the premium of $52,500 less the sum of the annuity payments theretofore made, would be paid by the company to the trustee upon the death of the annuitant. The company also agreed that all " * * * annuity payments, including the proportionate payment on the death of the annuitant * * * ", should be increased " * * * by such dividends as may be allotted by the Company out of its surplus interest earnings." The annuitant possessed the right, set forth in clause II of the policy, to surrender the policy for cancellation at any time, whereupon the company was obligated to pay to him the "principal sum" of $50,000.
In May, 1932, the taxpayer surrendered the policy for cancellation and received the sum of $50,000. Prior to the surrender of the policy the taxpayer had received by way of monthly payments, including monthly participation in profits, for fifty-one months, the total sum of $11,383.21. The taxpayer had considered that items constituting this sum were annuity payments and therefore did not include them in his income tax returns for the respective years in which they were paid to him by the company. In his income tax return for the calendar year 1932, however, the taxpayer reported a capital net loss of $85,751.22 which he obtained by reducing the amount of capital losses reported, viz., $94,634.43, by the amount of capital gain, viz., $8,883.21, achieved by the surrender of the policy to the insurance company. He determined the cost of the policy for income tax purposes to be $41,116.79, or the sum of the premium paid, viz., $52,500, less the aggregate amount of $11,383.21 paid to him in the monthly payments we have referred to. In short, upon his 1932 return the taxpayer reported a taxable net gain of $8,883.21, he having held the policy from January 7, 1928.
The Commissioner, however, eliminated the gain of $8,883.21 from capital gain as the taxpayer had reported it, and included gain in this amount as ordinary income subject to both normal tax and surtax.
It follows that the questions presented for our determination are twofold and may be stated as follows: First, were the sums which the taxpayer received periodically with the sum of $50,000 in 1932 from the company pursuant to his agreement or policy "amounts received * * * under a life insurance, endowment, or annuity contract * * * " within the meaning of Section 22(b)(2) of the Revenue Act of 1932, 26 U.S.C.A. § 22 note? Section, if these sums should be thus categorized, should they be treated as ordinary income to the taxpayer taxable as such or should the sum of $8,883.21 be deemed to be capital net gain and therefore taxable pursuant to the provisions of Section 101(c) of the Revenue Act of 1932, 26 U.S.C.A. § 101 note?
Section 22(b)(2) of the Revenue Act of 1932, c. 209, 47 Stat. 169, 178, exempts from taxation "Amounts received * * * under a life insurance, endowment, or annuity contract * * * " but further provides that " * * * 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 taxalbe year) then the excess shall be included in gross income."
Were the amounts received by the taxpayer beginning in February, 1929, and ending in May, 1932, "Amounts received * * * under a life insurance, endowment, or annuity contract * * * " within the meaning of the words of the statute quoted? Now it is obvious that a label placed upon an agreement by the parties thereto need not be determinative of its character. Stearns Co. v. United States, 291 U.S. 54, 61, 54 S. Ct. 325, 78 L. Ed. 647; Aluminum Castings Co. v. Routzahn, 282 U.S. 92, 99, 51 S. Ct. 11, 75 L. Ed. 234. Neither may it be contended that because the taxpayer treated the monthly payments received by him under the contract as annuity payments for income tax purposes that that fact is binding upon him now. We must regard the substance of the transactions and not their form.
The word "annuity" has been variously defined. Bouvier's Law Dictionary Vol. 1, Rawle's Third Revision, p. 201, describes an annuity as "A yearly sum stipulated to be paid to another in fee, or for life or years, and chargeable only on the person of the grantor." This definition is the common law definition. See In re Smathers' Will, 133 Misc. 812, 234 N.Y.S. 99, and In re Kohler, 96 Misc. 433, 160 N.Y.S. 669, 675. 1 Words and Phrases, Fourth Series, p. 164, describes an annuity as, " * * * a stated sum per annum payable annually, unless otherwise directed. It is not income or profits, nor indeterminate amount varying according to the income or profits, though a certain fund may be procided out of which it is payable", citing Town of Hartland v. Damon's Estate, 103 Vt. 519, 156 A. 518, 523. Words and Phrases also describes the term annuity as being " * * * generally understood as an agreement to pay a specified sum to the annuitant annually during his life," citing State ex rel. Thornton v. Probate Court of Ramsey County, In re Thornton's Estate, 186 Minn. 351, 243 N.W. 389, 391. Webster's New International Dictionary defines it as "An amount, especially of money, payable yearly for a certain or uncertain period, as for years, for life, or in perpetuity * * * ". Funk & Wagnalls Concise Standard Dictionary defines annuity as "An annual allowance or income". The Encyclopaedia Britannica, Eleventh Edition, describes an annuity as " * * * a periodical payment, made annually, or at more frequent intervals, either for a fixed term of years, or during the continuance of a given life, or a combination of lives." The authority referred to also states, "An annuity depending on the continuance of an assigned life or lives, is sometimes called a life annuity; but more commonly the simple term 'annuity' is understood to mean a life annuity, unless the contrary is stated. A life annuity, to cease in any event after a certain term of years, is called a temporary annuity." The word annuity " * * * has been the cause of puzzlement of mind, and there is a wealth of embarrassment in the decisions of the courts." 3 C.J.S., Annuities, § 1, p. 1373.
In our opinion an annuity may be described as a sum paid yearly or at other specified intervals in return for the payment of a fixed sum by the annuitant. The annuity itself is the totality of the payments to be made under the contract. Under the terms of the contract sub judice a monthly payment was contemplated to be paid to the annuitant until the death of the annuitant or the surrender of the policy by him. The contract under consideration therefore possesses dual characteristics. It is a life annuity in that it was terminable by the death of the annuitant and was a term annuity since it was terminable by the voluntary action of the annuitant. The whole of the sums paid by the insurance company to the taxpayer, including the monthly payments and the principal sum of $50,000, constitute the totality of the annuity. But the contract is not only a contract of annuity, it also possesses characteristics of a single premium straight life insurance contract. Most, if not all, of the characteristics of the contract lie within the two categories named and we are therefore of the opinion that the sums paid by the company to the taxpayer are within the purview of Section 22(b)(2).
In reaching this conclusion we are not unmindful of the contentions of the taxpayer to the effect that the contract between the taxpayer and the insurance company simply was one providing for the deposit of a fixed principal sum, payable to the depositor upon demand or at death with a guaranteed return upon the investment of 3 1/2% and additional sums by way of interest upon the taxpayer's investment as the insurance company allotted dividends from surplus interest earnings. We think, however, that this contention of the taxpayer cannot be supported upon the facts. The sum of $52,500 was not deposited with the insurance company; it was paid to that company by the taxpayer. The obligation of the insurance company was not to return $52,500, but to return a "principal sum" in the amount of $50,000. No interest designated as such was to be paid upon the sum paid by the taxpayer to the insurance company.As a matter of fact the monthly return of $145.83 contracted to be paid by the company to the taxpayer is 3 1/2% upon the principal sum of $50,000, and the sums payable monthly to the taxpayer by the company above the stipulated sum of $145.83 were dependent upon the allotment of dividends by the company from earnings. The transactions between the taxpayer and the insurance company bear only superficial resemblance to a deposit of money with a banking institution with interest payable at a fixed rate and the amount of the deposit repayable on demand.
Nor are we persuaded to a contrary conclusion by the reasoning embraced in the two decisions upon which particular emphasis is laid by the taxpayer, viz., State ex rel. Thornton v. Probate Court of Ramsey County, In re Thornton's Estate, 186 Minn. ...