Freeman v. Commissioner

4 T.C. 582, 1945 U.S. Tax Ct. LEXIS 251

• Court: United States Tax Court
• Decided: January 16, 1945
• Docket: Docket No. 1361
• Status: Published

Opinions

OPINION.

Murdock;, Judge'.

The petitioner contends that nothing received in the settlement represented income for 1939 and the Commissioner was, therefore, in error in including any part of the $80,000 in taxable income. He argues that there was at that time merely the substitution of one annuity for another — in fact, a smaller annuity for a larger one, so that, if anything, there was a loss. He also argues that he was on an accrual basis and should have accrued in 1929 or 1930 the then value of the annuity represented by the letter of March 7, 1929. He points out that the Commissioner was informed from year to year of the situation and the error can not be corrected by including any lump sum in income for 1939.

The result in this case does not depend upon what method the petitioner has used for reporting income, but, as a matter of fact, in returns prior to 1936 he had reported that he was using a cash basis. Therefore, although he stated in later returns and in his testimony that he was on an accrual basis, nevertheless, the record does not justify a finding that he was using an accrual basis in 1929 and 1930.

The petitioner worked for many years for the Brady estate. Apparently he did whatever work the Bradys told him to do. He asked for additional compensation for his services. Nicholas, in consideration of his “services past, present and future,” agreed to pay him as consulting accountant $12,000 a year for the petitioner’s life. It is nowhere suggested that this was unearned or a gift. Nothing was reported as taxable income prior to 1939. No amount was reported in 1929 or 1930 representing the cost or value of an annuity contract. No annuity was purchased at that time. The letter represented a contract of employment under which the petitioner might receive payments for life provided he fulfilled his part of the bargain. No regular and unconditional annuity was purchased. It would appear that no amount was taxable at that time under the principles announced later in Renton K. Brodie, 1 T. C. 275, but whatever he received in payments would be taxable income as received. Nothing was ever reported in prior years, so it is clear that he had no cost or basis for income tax purposes which should be recovered tax-free. The reduction in annual receipts did not represent any loss for tax purposes. It meant only that his taxable income would be less. Where a man has a prospect of receiving $12,000 a year which would be taxable income as received, he certainly has no loss for income tax purposes when the amount actually received is less.

A change took place in 1939, the taxable year. The petitioners at that time received and accepted the equivalent of $80,000, $8,660.80 of this was in cash and the balance was used to purchase annuity contracts as might be selected by the petitioners. Clearly, the cash was all taxable income under section 22 (a). It represented monthly payments of $1,000 for several preceding months, all of which was compensation for services rendered. The petitioners were offered the balance in cash, but they refused and agreed, instead, that the balance should be used to purchase annuities for them from an insurance company. Under such circumstances the entire amount used to purchase the annuity contracts is taxable income. See Richard R. Deupree, 1 T. C. 113; cf. George Matthew Adams, 18 B. T. A. 381. Furthermore, these contracts of the insurance company to pay annuities were quite a different thing from the petitioners’ rights under the letter from Nicholas Brady dated March 7, 1929. They represented' the absolute right to receive the annuities, with no conditions whatsoever, whereas the Brady letter was a mere promise to pay compensation under the circumstances described in the letter. It was simply a letter from the employer and not an absolute contract or annuity. The amount paid for the annuities is taxable income under the principle of the Brodie case, supra, and would be so even if the petitioners had not been offered the full amount in cash and had not been allowed to select the annuities themselves. We hold that the cost of annuities purchased to compensate the petitioner for services is income in 1939 under the circumstances here present. Payments under the annuity contracts may be reported properly under section 22 (b) (2), and for that purpose $71,339.20 will represent their cost.

Reviewed by the court.

Decision will be entered for the- respondent.