1962 U.S. Tax Ct. LEXIS 34">*34
Insured's election in 1950, before maturity under insurance company's annuity policy, to leave cash surrender value (principal sum) on deposit and receive monthly installments of principal augmented by interest and dividends,
39 T.C. 341">*341 OPINION.
Respondent determined a deficiency in income tax for the calendar year 1951 in the amount of $ 12,517.26.
Three errors were assigned by petitioners as follows:
(a) The Commissioner erred in determining that the Decision of the Tax Court of the United States in
(b) The Commissioner erred in determining that the amount of $ 21,384.63 represents taxable income constructively1962 U.S. Tax Ct. LEXIS 34">*36 received in the calendar year 1951.
(c) The Commissioner erred in determining that
The facts were stipulated and are so found.
Petitioners' decedent, Harry Snider, and petitioner Lena Snider were husband and wife during 1951 and resided in Newton, Massachusetts. Harry Snider and Lena Snider filed their income tax return 39 T.C. 341">*342 for 1951 with the then collector of internal revenue for the district of Massachusetts.
On September 29, 1932, The Equitable Life Assurance Society of the United States (hereinafter sometimes referred to as Equitable) issued to Harry Snider a life annuity contract No. X8932022.
At the time of the issuance of the annuity contract, Harry Snider, on his nearest birthday, would be 44 years of age. He was born March 15, 1889, and died April 11, 1957, at the age of 68.
Under the terms of the annuity contract, Equitable agreed to pay to Harry Snider a life annuity of $ 13,896 per year, payable during his life in monthly installments of $ 1,158, beginning on the anniversary of the register date of the contract upon which Harry Snider's age at nearest birthday is 65 years.
The annual premium due under1962 U.S. Tax Ct. LEXIS 34">*37 the terms of the annuity contract was $ 5,000, payable each year on September 29, until September 29, 1953, the date on which the contract would mature.
Among other things, the annuity contract dated September 29, 1932, provided the annuitant (Harry Snider) with certain options as follows:
OPTIONS ON SURRENDER OR LAPSE.
Within three months after default in the payment of any premium after one full year's premium has been paid, the Annuitant may surrender this contract and elect one of the following Options:
(a) CASH VALUE. To receive the Cash Surrender Value as provided in Schedule "C."
* * * *
The payment of any Cash Surrender Value may be deferred by the Society [Equitable] for a period not exceeding ninety days after receipt of application therefor.
On September 10, 1950, the life annuity contract was amended at the request of Harry Snider. The amendment thereof provided in part that:
If this contract be surrendered by the Annuitant for its Cash Surrender Value, the Annuitant, by written notice filed with the Society at its Home Office at the time of such surrender, may elect to have the Cash Surrender Value, together with any unpaid dividends or dividend accumulations hereunder, 1962 U.S. Tax Ct. LEXIS 34">*38 applied under Options 1, 2 or 4 of the "Modes of Settlement at Death of Annuitant" herein set forth, but for the benefit of the Annuitant in lieu of the beneficiary under this contract. A supplementary contract evidencing such election will then be issued by the Society.
The annuity contract as amended by the attachment dated September 10, 1950, provided Harry Snider with certain settlement options, Option 4 thereof being as follows:
Paid in equal annual, semi-annual, quarterly or monthly instalments of such amount as may be agreed upon until the net sum due under this contract
On September 14, 1950, Harry Snider elected to exercise Option 4 and filed with Equitable an election of mode of settlement1962 U.S. Tax Ct. LEXIS 34">*39 relative to the annuity contract. This election provided in part as follows:
I hereby elect to have the net sum due including dividends under the above numbered policy settled as I have indicated below: (Minimum $ 1000. each option)
* * * *
X INSTALMENT OPTION -- FIXED AMOUNT:
Proceeds to be paid in
instalments of $ 1000.00 each until the amount so applied credited annually
On September 28, 1950, Equitable, 1962 U.S. Tax Ct. LEXIS 34">*40 pursuant to Harry Snider's election of the mode of settlement, canceled Annuity Contract No. X8932022, and thereafter, on September 29, 1950, issued to Harry Snider a supplementary Contract No. 161,332 which provided, in part, as follows:
THE EQUITABLE LIFE ASSURANCE SOCIETY
of
The United States
No. 161,332 $ 110,950.00
hereby certifies that the sum of
* * * *
At any time said HARRY SNIDER may withdraw the balance remaining under this bond or may make partial withdrawals therefrom of not less than ONE HUNDRED DOLLARS.
PARTIAL WITHDRAWALS PROVIDED FOR HEREIN MAY BE MADE WITHOUT EITHER THE SURRENDER OF THIS BOND OR ENDORSEMENT THEREON TO SHOW THE SAME.
39 T.C. 341">*344 Upon the death of said HARRY SNIDER, provided this bond is then in force, any instalments remaining1962 U.S. Tax Ct. LEXIS 34">*41 unpaid shall be paid when due to said HARRY SNIDER'S wife, LENA SNIDER. At the death of the survivor of said HARRY SNIDER and said wife, any balance remaining with the Society shall be paid to the executors or administrators of such survivor
* * * *
The nominee, after the death of said HARRY SNIDER, may designate (with the right to change such designation) the person to receive any instalments remaining unpaid at the death of the nominee, if there be no such person designated by said HARRY SNIDER and surviving.
* * * *
* * * *
This bond is issued in full settlement of Contract No. 8,932,022 and is effective provided said HARRY SNIDER is living on the Register date hereof. [Emphasis supplied.]
As of September 28, 1950, Harry Snider had paid to Equitable net premiums on the annuity contract in the amount of $ 89,565.37. The cash surrender value of the annuity contract as of September 28, 1950, was $ 110,950, or $ 21,384.63 in excess of the premiums paid.
On January 12, 1955, Harry Snider requested that Equitable1962 U.S. Tax Ct. LEXIS 34">*42 rewrite the contract eliminating all withdrawal rights. The body of his request is as follows:
When, on September 14, 1950, I made the election to take the cash value of the above policy to be paid in installments it was not my intention to retain any right to make withdrawals from principal, and the fact that such withdrawl rights were included in the Supplementary Contract was not discovered by me until recently.
Therefore will you please rewrite the above contract so as to eliminate all withdrawal rights.
Subsequently, Equitable reissued the supplementary contract on a form which made no provision for any principal withdrawals.
On March 14, 1955, respondent sent to Harry Snider and Lena Snider a statutory notice of determination of a deficiency in income tax for the taxable year
In the statutory notice for the year 1950 the respondent increased the net income as disclosed by the return by "(a) Insurance proceeds $ 21,384.63." In the statement attached to the notice, he explained item (a) as follows:
(a) Insurance proceeds | $ 21,384.63 |
Excess of insurance proceeds constructively received (
Proceeds | $ 110,950.00 |
Net premiums paid | 89,565.37 |
Excess as above | 21,384.63 |
39 T.C. 341">*345 Retirement annuity policy No. X8,932,022 taken out with Equitable Life Assurance Society on Sept. 29th, 1932 was surrendered on Sept. 9, 1950 [
In
In adjusting the taxable income reported for the year
It has been determined that the Decision1962 U.S. Tax Ct. LEXIS 34">*44 of the Tax Court of the United States in
Although petitioners have assigned three errors, they have only argued assignment (b) in their briefs. Assignments (a) and (c) deal with whether the statutory notice of deficiency for the calendar year 1951 was timely under
We do not think the respondent, in contending that the amount of $ 21,384.63 was constructively received in 1951, is in any better position than when he contended1962 U.S. Tax Ct. LEXIS 34">*45 that the same amount was constructively received in 1950. The agreements all remained the same in 1951 as they were in 1950. There were no changes. The only incident that might give some possible basis for respondent's present contention is that if in 1950 under the supplementary contract Harry Snider had made application to "withdraw the balance remaining under this bond," Equitable's right to defer payment for a period not to exceed 6 months would have expired in 1951. 1 But Snider made no such application in 1950 or at any other time, and under the supplementary contract "Payment of any sum withdrawable 39 T.C. 341">*346 hereunder may be deferred by the Society [Equitable] for a period not exceeding six months
1962 U.S. Tax Ct. LEXIS 34">*46 At this point it may be noted that a new fact was stipulated in the present record that was not before the Court in the record made for the year 1950. That fact concerns the complete elimination of all withdrawal rights requested on January 12, 1955. Not only did Harry Snider never make any application to "withdraw the balance remaining under this bond" but he notified Equitable that when he made the election on September 14, 1950, to take the cash value of Policy No. X8932022 to be paid in installments "it was not my intention to retain any right to make withdrawals from principal, and the fact that such withdrawal rights were included in the Supplementary Contract was not discovered by me until recently." Upon his request Equitable "reissued the Supplementary Contract on a form which made no provision for any principal withdrawals."
In
If an insurance policy is not that intended1962 U.S. Tax Ct. LEXIS 34">*47 or does not express the actual contract intended by the parties because of the * * * mutual mistake of the insured and such agent, a court of equity has the power to grant a reformation of the policy so as to have therein expressed the true agreement of the parties. While there is some authority to the contrary, most courts hold that a policy may be reformed where it does not conform to the agreement of the parties although the mistake, insofar as the company is concerned, was that of a mere soliciting agent with no power to write or to issue a policy.
Aside from this new fact, we pointed out in
39 T.C. 341">*347 Petitioner was, to be sure, in the position where from the very inception of the policy he could demand its cash surrender value. Since this was an annuity agreement, this cash payment almost from the beginning would have been greater than the amount deposited by decedent. On that theory, which is not supported by any case, regulation or ruling, decedent would have constructively received each year the increase in the cash value of the policy. But even on that untenable hypothesis, in the year before us the only amount with the constructive receipt of which he could be charged would be the increment in that year.
And if it were to be argued, which it is not, that the form of words "I hereby surrender the said policy * * * for its cash surrender value" demonstrates that decedent did in fact receive the cash surrender value at that time, a reading of the entire paragraph in which that language appears prohibits any such construction. Immediately following those words decedent expressly reserves the right to the "privileges and benefits under the said policy" that the amount 1962 U.S. Tax Ct. LEXIS 34">*49 specified shall be applied "under the option elected." This would have been impossible had decedent in fact surrendered the policy, and for that reason it is equally impossible to say that he elected to receive the cash surrender value of the policy or that he could "hereby surrender" the policy.
We conclude that decedent at no time elected to take the cash surrender value of the policy. Had he done so, he would have been required to surrender the policy completely. Instead he elected an option which under the policy, as amended, he was permitted to do, provided he did not surrender the policy. In some respects this is similar, though a stronger case, to the one dealt with in S.M. 5680, The taxpayer, having exercised the first option, actually received the sum of 11x dollars [a cash dividend], and the question is, Did he constructively receive the further sum of 21x dollars which he would have received if he had exercised the third option [to take 1962 U.S. Tax Ct. LEXIS 34">*50 the paid-up value]? It is apparent that the taxpayer could not at the same time possess both his insurance and the 32x dollars, which was payable only upon the cancellation of the policy. The only theory upon which it can be held that he constructively received the latter amount is that he, for the momentary period he is supposed to have been in constructive possession of this sum, had constructively surrendered his policy, a theory unknown to the law of insurance. * * * The only way by which the taxpayer could have acquired the guaranteed reserve was by the surrender of his policy and the loss of that which for 20 years he had paid to acquire. There can be no constructive receipt of that which can be acquired only by the surrender of valuable rights. * * *
When Harry Snider made his election in 1950 supplementary contract No. 161,332 provided that the fund from1962 U.S. Tax Ct. LEXIS 34">*51 which the monthly payments of $ 1,000 were to be made was to be credited annually with interest at the rate of 3 percent per annum on the unpaid balance and that "If in any year the Society declares that funds held under this bond shall receive interest in excess of 3% per annum, the interest under this bond shall be increased for that year by an Excess Interest 39 T.C. 341">*348 Dividend as determined and apportioned by the Society." Harry Snider would have had to surrender these valuable rights if at any time he had made application to "withdraw the balance remaining under this bond." The doctrine of constructive receipt is to be sparingly applied and is to be invoked only in unique circumstances and in a clear case.
We hold1962 U.S. Tax Ct. LEXIS 34">*52 that the amount of $ 21,384.63 was not constructively received by Harry Snider in the calendar year 1951 and that petitioners realized no income until the total amounts received by Harry Snider or his nominee or nominees under contract No. 161,332 exceeded the aggregate premiums of $ 89,565.37 paid for Policy No. X8932022. All of that will take place at a later date and the Government will not lose its tax on the income.
It thus becomes unnecessary to consider assignments of error (a) and (c).
1. In our opinion in
"This disposition of the case does not, to be sure, resolve the total problem. The 6 months in question expired in the following year and it may be, of course, that decedent can be charged with this income in that year. See
2.