Sheridan v. Commissioner

Donald H. Sheridan and Kathryn Sheridan, Petitioners, v. Commissioner of Internal Revenue, Respondent Sheridan v. Commissioner Docket No. 28109 United States Tax Court 18 T.C. 381; 1952 U.S. Tax Ct. LEXIS 187; May 22, 1952, Promulgated *187 Decision will be entered under Rule 50. Loss incurred in annuity venture entered into for profit held deductible under section 23 (e) (2) of the Internal Revenue Code. William F. Hanrahan, Esq., and Harold T. Gates, C. P. A., for the petitioners. Lester H. Salter, Esq., for the respondent. Arundell, Judge. ARUNDELL *381 The respondent has determined a deficiency of $ 538.05 in the petitioners' income tax for the calendar year 1945. The deficiency results from the disallowance of a deduction in the amount of $ 1,121.05 claimed as interest on an annuity. The petitioners while no longer contesting the disallowance of the interest item as such seek an overpayment on the basis that petitioner Donald H. Sheridan's annuity*188 payments, which were applied against principal, exceeded the consideration *382 received by him for the annuity contract by the amount of $ 3,124 in 1945. The petitioners claim the $ 3,124 excess as a deductible loss. The case was submitted on a stipulation of facts and exhibits. All stipulated facts are found as stipulated. FINDINGS OF FACT. The petitioners, individuals residing at Delafield Island Road, Darien, Connecticut, filed a joint return for the taxable year in question with the collector of internal revenue for the district of Connecticut. Prior to September 18, 1926, the petitioner, Donald H. Sheridan, hereinafter referred to as Donald, Donald's uncle, Charles Hart, and Donald's aunt, Irene Collord, each owned an undivided one-third interest in certain real property located in New York, New York. On or about September 18, 1926, Donald and Charles Hart acquired Irene Collord's interest in the aforementioned real property executing jointly in part consideration therefor a purchase money mortgage to Irene Collord in the amount of $ 100,000. On November 4, 1935, at which time Donald and Charles Hart remained indebted to Irene Collord in the principal amount of the mortgage*189 previously referred to, Irene Collord wrote to Donald as follows: My dear Donald: In connection with the transfer by me to you as of the above date, of the mortgage held by me upon property owned by you and Charlie, in view of the hard times and the uncertain condition of real estate, and because of present high income taxes and my fear that for many years to come income taxes will be as high as now, if not higher, and in order to save myself income taxes, as I understand an annuity is only taxable in part whereas mortgage interest is taxable in full, I am willing to and do convey to you and Charlie an interest in said mortgage of $ 60,000.00, which represents the approximate present value, as I am informed, of an annuity of $ 7,000.00 a year in semi-annual instalments for the balance of my life, which I ask you to pay to me in consideration of the release to you of the said $ 60,000.00 of said mortgage at the present time. The balance of $ 40,000.00 I give you and Charlie as a voluntary gift, to relieve you from worry of possible foreclosure, and I am sure that I will feel well repaid by the thought that when we see each other in the years to come, we can enjoy our association*190 unhampered by the relationship of mortgagee and mortgagor. A similar letter was sent to Charles Hart. Donald and Charles Hart agreed to make these annuity payments. On November 7, 1935, Irene Collord assigned to Donald and Charles Hart $ 60,000 of the mortgage in consideration of their agreement and $ 40,000 of the mortgage as a gift, and filed a gift tax return for the calendar year 1935 disclosing net gifts in the amount of $ 37,336. *383 The agreement entered into in 1935 constituted an annuity contract which the petitioner Donald entered into for profit. The contract was sought by Irene Collord to secure for herself tax savings under the provisions for the taxation of annuity payments. The value of the annuity contract received by Irene Collord was approximately equal to the $ 60,000 mortgage indebtedness she assigned in exchange therefor. The contract was not intended to be and was not in fact or effect an adjustment of the purchase price of the real estate purchased by Donald and his uncle from Irene Collord in 1926. From 1935 through December 31, 1944, Donald made payments applied to the principal amount of the annuity in the aggregate amount of $ 29,624.20. In *191 the years 1943 and 1944 "Donald made payments applied to annuity interest in the aggregate amount of $ 1,875.80," claiming deductions therefor on his income tax returns in those years. In the calendar year 1945, Donald made a $ 3,500 payment to Irene Collord. The petitioners paid as estimated tax for the calendar year 1945 the sum of $ 4,580.45, which amount, pursuant to the provisions of section 322 (e) of the Internal Revenue Code, is deemed to have been paid on March 15, 1946. The petitioners further paid tax for the calendar year 1945 in the amount of $ 94.53 by receiving a credit in that amount on March 15, 1945, by reason of an overpayment for the calendar year 1944. OPINION. The sole question before us is whether the sum of $ 3,124, which represents the amount by which the payments (other than the portion of the payments claimed and allowed as interest deductions) made by Donald H. Sheridan (referred to herein as Donald) as payor under an annuity contract exceeded the value of the consideration he received for the agreement to make the payments, is deductible under section 23 (e) (2) as a loss incurred in an annuity venture entered into for profit. The facts upon which this*192 issue is based are as follows: In 1926 the petitioner Donald and his uncle purchased real estate from Donald's aunt, Irene Collord, and executed in part consideration therefor a purchase money mortgage in the amount of $ 100,000. In 1935, when Donald and his uncle were still indebted to Irene Collord for the principal amount of the mortgage, Irene Collord released $ 40,000 of the mortgage as a gift and, in addition, released the remaining $ 60,000 in consideration of a promise by Donald and his uncle to pay her $ 7,000 a year for the remainder of her life. During the years 1935 through 1944, Donald made payments totaling $ 31,500 to Irene Collord. A total of $ 1,875.80 of this sum was *384 claimed and allowed to Donald for the years 1943 and 1944 as an interest deduction, leaving a balance of $ 29,624.20, which he refers to as the sum applied to the principal of the annuity. During the taxable year in question, Donald paid to Irene Collord a further sum of $ 3,500. The petitioners claim that $ 3,124 of this sum represents a deductible loss incurred in an annuity venture entered into for profit. The sum of $ 3,124 was the excess of all payments made by Donald to Irene Collord*193 except the $ 1,875.80 which was deducted as interest in prior years, over the $ 30,000 representing Donald's share of the discharged indebtedness. The respondent on brief argues that the sum of $ 3,124 is not deductible as a loss because the transaction in 1935 "constituted in effect an adjustment of the purchase price of the real property acquired in 1926. Therefore, the annuity payments were capital expenditures and no loss was realized by the petitioners in the calendar year 1945." From this factual premise, the respondent concludes that all installment payments by Donald were capital expenditures applied to the purchase price of the real estate. In our opinion the factual premise upon which the respondent bases his conclusion is contradicted by the evidence. The purchase price agreed to was not adjusted or affected in any way by the contract entered into in 1935, and remained the same as it had always been since 1926. The 1935 contract was sought by Irene Collord as a means of securing for herself a tax saving under the provisions for the taxation of annuity payments. The value of the annuity contract she received was approximately equal to the $ 60,000 obligation she released*194 in exchange. There was no disparity in the value of what the parties to that contract exchanged as consideration, and the contract was, in substance and effect, devoid of any purchase price adjustment or of any agreement relating to the purchase price of property. Similarly, the remaining $ 40,000 was released by Irene Collord as a gift, not in pursuance of any purchase price adjustment, and was reported by her as a gift in a Federal gift tax return filed for the calendar year 1935. In short, the conduct of the parties to the 1935 agreement, as well as the circumstances of that agreement, adequately establish that the agreement was not intended to and did not in fact constitute either in substance or effect an adjustment of the purchase price of the real estate acquired by Donald and his uncle from Irene Collord in 1926. On the contrary, the agreement was simply an annuity contract and the sums paid by Donald were installment payments made pursuant to that contract. As far back as 1922, the Commissioner ruled in I. T. 1242, I-1 C. B. 61, that "When the total amount paid (by the payor under an annuity contract) equals the principal sum paid to the taxpayer, the installments *385 *195 thereafter paid by him will be deductible as a business expense in case he is engaged in the trade or business of writing annuities; otherwise they may be deducted as a loss, provided the transaction was entered into for profit." It is our understanding that the respondent in this proceeding accepts that ruling as correctly stating the law of the case. We think it is clear that Donald entered into the annuity venture for profit. The annual payments were not gifts to his aunt, but were instead payments in discharge of an obligation incurred for good and adequate consideration. Donald stood to gain if his aunt died before the installments totaled $ 30,000, and the gain would have constituted taxable income to him. I. T. 1242, supra. Cf. Bodine v. Commissioner, 103 F. 2d 982. Similarly, when the total amount paid by the taxpayer-payor under an annuity contract equals the principal sum received in consideration of his obligation to make the annual payments, any further payments represent a loss, deductible under section 23 (e) (2) of the Code as a loss incurred in a transaction entered into for profit. Decision will be entered under Rule 50*196 .