Moffett v. Commissioner

Irene C. Moffett, Petitioner, v. Commissioner of Internal Revenue, Respondent Moffett v. Commissioner Docket No. 18451 United States Tax Court 14 T.C. 445; 1950 U.S. Tax Ct. LEXIS 249; March 21, 1950, Promulgated *249 Decision will be entered under Rule 50. Petitioner is a surviving life annuitant under certain annuity contracts purchased by her deceased husband, Franklyn L. Hutton, for a consideration of $ 730,000. On the death of Hutton, these contracts were included in his gross estate for estate tax purposes at a compromise valuation. Petitioner received no other property from decedent's estate. Petitioner, individually, was required to pay the estate tax deficiency to prevent transferee assessment and the filing of a lien against the annuity contracts. In the taxable year 1944, petitioner paid the sum of $ 48,264.04 on account of the estate tax deficiency. In her individual income tax return for 1944, no part of the annuity payments received by her was included in her gross income. The respondent included in her gross income the amount of $ 21,900, or 3 per cent of the consideration of $ 730,000 paid for the annuity contracts, and determined the contested deficiency. Held: (1) Respondent properly included the sum of $ 21,900 as taxable income of petitioner under section 22 (b) (2) (A), Internal Revenue Code. (2) The payment by petitioner, as transferee, in 1944 of the sum of*250 $ 48,264.04 constitutes a capital expenditure, which is to be amortized over the life expectancy of petitioner. Hugh C. Bickford, Esq., for the petitioner. Ellyne E. Strickland, Esq., for the respondent. Leech, Judge. LEECH *445 This proceeding involves a deficiency in income tax for the year 1944 in the amount of $ 5,134.38. The issue, as we view it, is whether petitioner, surviving annuitant, is taxable in any amount of annuities *446 received by her in 1944 under certain annuity contracts which respondent included in the gross estate of her deceased husband, she having paid the estate tax deficiency determined against his estate, as transferee of such annuity contracts. The case was submitted upon a stipulation of facts with exhibits and certain other documents received in evidence. The facts as stipulated are so found. FINDINGS OF FACT. Petitioner is an individual, residing in New York City. Her income tax return for the year 1944 was filed with the collector of internal revenue for the third district of New York. Petitioner was at all times material hereto, until December 6, 1940, the wife of Franklyn L. Hutton. On January 3, 1934, Franklyn L. Hutton's*251 daughter by a previous marriage, Barbara Hutton Mdviani, gave him $ 730,000 to purchase annuity contracts. He purchased seven such contracts for a total consideration of $ 730,000. They provided that payments totaling $ 39,818.98 a year be made to petitioner and her husband, jointly, or to the survivor of them, for life. Franklyn L. Hutton was born December 1, 1876, and petitioner was born August 9, 1891. After the issuance of said policies until December 6, 1940, petitioner and her husband, Franklyn L. Hutton, received annual annuity payments as provided in those contracts. Franklyn L. Hutton died on December 6, 1940, and petitioner thereafter received the annual annuity payments provided for in the contracts. From 1941 to 1943, inclusive, petitioner reported as income from the annuity contracts the sum of $ 21,900 in each year, representing 3 per cent of the total premiums paid for the contracts. Petitioner duly qualified as executrix of the estate of Franklyn L. Hutton and, as such, filed an estate tax return showing a total gross estate of $ 674,852.54 and deductions totaling $ 627,960.66. On audit, the respondent determined that decedent's gross estate amounted to $ 1,115,413.36, *252 and that deductions were allowable in the sum of $ 611,989.33. The seven annuity contracts were not included in the estate tax returns filed by petitioner as executrix of the estate of Franklyn L. Hutton. On February 29, 1944, a letter was mailed to the estate of Franklyn L. Hutton, proposing a deficiency in estate tax of $ 319,420.42. In the proposed deficiency the aforesaid contracts were included in the gross estate at a value of $ 849,746.06. Negotiations over the proposed deficiency ensued for a period of several months. As a result, the respondent reduced the valuation of the annuity contracts to $ 424,873.03. After making certain other adjustments, the respondent *447 determined a total tax payable of $ 89,306.28. Inasmuch as the tax shown on the estate tax return was $ 151.62, a deficiency in estate tax was proposed in the amount of $ 89,154.66, which was reduced by allowing a credit of $ 11,150.66 for state estate or inheritance taxes. A waiver of restrictions against immediate assessment and collection of a deficiency in estate tax in the amount of $ 78,004, with interest, was forwarded to the estate of Franklyn L. Hutton for signature by the petitioner, as executrix*253 and transferee. On June 3, 1944, counsel for the executrix wrote, suggesting that the waiver be signed "without prejudice," leaving the executrix the right to sue for recovery of the tax. This request was rejected and counsel was advised that if definite action were not taken by June 26, a statutory notice would be issued. On June 19, 1944, petitioner, as executrix and transferee of the estate of Franklyn L. Hutton, signed Form 890, consenting to the assessment of a deficiency in estate tax against decedent's estate in the sum of $ 78,004, which deficiency was computed as above set forth. Thereafter various letters were exchanged in relation to the payment of the estate tax deficiency. On January 23, 1945, counsel for petitioner was advised by the internal revenue agent in charge that the collector of internal revenue had requested immediate transferee assessment against petitioner and the insurance companies. Under the same date, counsel for petitioner replied that duress and the threat of seizure of the annuities under transferee assessment rendered it necessary and obligatory for Irene W. Hutton Moffett, in order to protect the annuity policies, to personally borrow the sum*254 of $ 54,049.25 to pay the balance of the estate tax, interest, and fees. The deficiency in Federal estate tax assessed against the estate of Franklyn L. Hutton in the amount of $ 78,004, plus interest of $ 11,964.68 thereon, was paid by petitioner personally, as follows: July 22, 1944 $ 25,226.80 Oct. 16, 1944 11,886.58 Jan. 29, 1945 52,855.30 The Florida inheritance taxes in the amount of $ 11,150.66, referred to in the computation of the deficiency, were paid by petitioner, as follows: Aug. 16, 1944, $ 5,000; and Sept. 30, 1944, $ 6,150.55. (The difference of 11 cents is unexplained.) Petitioner received no assets (other than her interest in the annuity contracts as aforesaid) from the estate of Franklyn L. Hutton. Petitioner reported no income from the said annuity contracts in either her original or her amended income tax return for the year 1944. The deficiency involved herein is based primarily upon the respondent's determination that there should be included in petitioner's income for the taxable year the amount of $ 21,900, or 3 per cent of $ 730,000, the original cost of the annuity contracts. *448 OPINION. Petitioner contends that respondent erred in including*255 in her income for the year 1944 the sum of $ 21,900, representing 3 per cent of the original cost of certain joint and survivor annuity contracts. It appears to be the position of petitioner that, since she was required, as transferee, to pay the deficiency in estate taxes determined against her husband's estate in order to protect her interest in those contracts, no part of the annual payments under those contracts is includible in her gross income until she has recouped the sum so paid. Petitioner argues that the annuity contracts should not have been included in the gross estate of her deceased husband; and, since she was required to pay the estate tax deficiency as transferee, the payment was made under duress. Assuming the soundness of those contentions, we think it unnecessary to discuss the remedies that might have been open to petitioner at the time she agreed to and did pay the deficiency. In any event, on this record, we are convinced that she can not contest the propriety of that determination here. Thus, for the purposes of this proceeding, such payment must be treated as a legal exaction. The payment of the estate tax deficiency had no effect on the relationship*256 of the company issuing the annuity contracts and petitioner. She was the annuitant during the tax year. We, therefore, hold that the respondent properly included in petitioner's taxable income for the taxable year involved 3 per cent of the total consideration of $ 730,000 paid for the issuance of the annuity contracts, or the sum of $ 21,900, under section 22 (b) (2) (A) of the Internal Revenue Code. Title Guarantee & Trust Co., Executor, 40 B.T.A. 475. It appears from the record that petitioner received no other property from the estate of her deceased husband. The annuity contracts were included in the latter's gross estate for Federal estate tax purposes at a valuation of $ 424,873.03. The basis on which such valuation was fixed is not disclosed. The deficiency in Federal estate taxes, to the amount of which petitioner, as transferee, consented, was in the amount of $ 78,004, plus interest of $ 11,964.68. In addition, petitioner paid Florida inheritance taxes in the amount of $ 11,150.66. In the taxable year 1944, petitioner paid from her own funds an aggregate of $ 48,264.04 on account of the Federal estate tax deficiency determined against*257 the estate of Franklyn L. Hutton, consisting of an amount of $ 37,113.38 paid directly to the collector, and the further sum of $ 11,150.66 paid on account of Florida inheritance taxes, for which latter sum a credit was allowed in the computation of the estate tax deficiency. Such payment was made as a transferee of property on which a part of the estate tax deficiency was based, i. e., the annuity contracts. The payment was made for the protection and preservation *449 of her rights as annuitant, and constitutes a capital expenditure. Morgan Jones Estate, 43 B.T.A. 691; affd., 127 F.2d 231; Edwin M. Klein, 31 B.T.A. 910; affd., 84 F.2d 310. The character of the expenditure is such that it can not be recovered except by amortization. What, then, is the fair and equitable method for the amortization of such expenditure? The annuity contracts with respect to which the expenditure was made are to continue during the life of petitioner, and we think it should be amortized over that period. Cf. William Ziegler, Jr., 1 B.T.A. 186;*258 Christensen Machine Co., 18 B.T.A. 256; Ida Wolf Schick, 22 B.T.A. 1067. We, therefore, hold that petitioner is entitled to a deduction in the taxable year 1944 of an amount to be determined by dividing the expenditure of $ 48,264.04 made in 1944 by the number of years remaining in petitioner's life expectancy determined as of 1944. She was born August 9, 1891. By way of illustration, assuming that in 1944 petitioner had an expectancy of 15 years, the amount of the deduction would then be $ 48,264.04 divided by 15, or $ 3,217.60. However, the correct amount of the allowable deduction will be determined under the above formula under Rule 50. Decision will be entered under Rule 50.