Arnfeld v. United States

• Decision Date: 16 July 1958
• Docket Number: No. 477-55.,477-55.
• Citation: 163 F. Supp. 865
• Parties: Eugene J. ARNFELD and Henry J. Moses, Executors of the Estate of Andrew Wineman, Deceased, and Eugene J. Arnfeld and Mortimer H. Meyer, Successor Executors of the Estate of Elsa Wineman, Deceased, v. UNITED STATES.
• Court: U.S. Claims Court

163 F. Supp. 865

Eugene J. ARNFELD and Henry J. Moses, Executors of the Estate of Andrew Wineman, Deceased, and Eugene J. Arnfeld and Mortimer H. Meyer, Successor Executors of the Estate of Elsa Wineman, Deceased, v. UNITED STATES.

No. 477-55.

United States Court of Claims.

July 16, 1958.

Joseph H. Sheppard, Washington, D. C., for plaintiffs. J. Marvin Haynes, Haynes & Miller, N. Barr Miller, and Arthur H. Adams, Washington, D. C., were on the briefs.

David R. Frazer, Washington, D. C., with whom was Asst. Atty. Gen., Charles K. Rice, for defendant. James P. Garland, Washington, D. C., was on the brief.

JONES, Chief Judge.

Plaintiffs, executors of the estates of Andrew and Elsa Wineman, sue to recover income taxes and deficiency interest for the year 1951. The amount claimed is $25,494.25.

The issue presented for our determination is whether the increment realized by taxpayer Elsa Wineman upon the transfer of an annuity contract prior to its maturity constitutes ordinary income or capital gain.

The annuity contract in question was acquired by Andrew Wineman on January 6, 1933, and thereafter was assigned to his wife, Elsa Wineman, on January 11, 1933. Issued by the Penn Mutual Life Insurance Company, the policy was an 18-year optional deferred income contract, to mature when the insured reached the age of seventy years. Part of the contract consisted of a variable deposit rider which permitted deposits at any time by the insured or his assignees. The aggregate deposited was not to be in excess of $100,000, unless the company should waive such limit. The maturity date of the policy was January 6, 1951.

The contract was purchased by Andrew Wineman from a Howard A. Kaichen who, at the time, held a general agency contract with the Penn Mutual Life Insurance Company. Kaichen represented that company as a general agent from 1932 until 1941 when his contract was terminated. He thereafter had no connection with the Penn Mutual company.

The optional deferred income contract was first called to Andrew Wineman's attention by Kaichen in late 1932. The early depression years had seriously undermined financial conditions in Detroit, Michigan, where Andrew Wineman resided and carried on his business. As a result, those who had invested in stocks, bonds, and real estate began to witness the decline of their property values. To meet the needs of such persons, by way of providing a conservative investment, the Penn Mutual Life Insurance Company, along with other insurance companies, began offering policies of the type purchased by Wineman.

With the coming of the postwar inflationary spiral, however, conservative investments such as reflected in the optional deferred income contract became less attractive than other investments. For that reason, Wineman thought that he had made a poor investment. His misgivings turned to criticism of Kaichen for inducing him to purchase the annuity contract. Because of such criticism, Kaichen finally suggested to Wineman that he sell the policy and use the proceeds to acquire common stock or other more profitable securities. Kaichen thought it advisable to sell the policy, rather than surrender it to the insurer for its cash surrender value, because he believed that an income tax saving could thereby be realized. His belief concerning the tax consequences of such a transaction was confirmed by Wineman's regularly employed accountants after consultation with their Washington, D. C., office. Briefly, Wineman's accountants informed him that if a bona fide sale of the policy were made, the Treasury Department would treat any profit derived therefrom as long-term capital gain instead of as ordinary income.

Kaichen thereafter suggested that the annuity contract be sold to the National Bank of Detroit, since he had no intention of purchasing it himself. Following this suggestion, Wineman went to the bank on January 3, 1951, accompanied by Kaichen. They were informed by the vice president of the bank that, since the National Bank of Detroit was a national bank, it was precluded by law from making the purchase. The vice president did suggest, however, that the bank would loan Kaichen $117,000, the agreed selling price of the contract, on Kaichen's note with the policy as collateral if he would buy the policy.

On the same day, Elsa Wineman transferred the policy to Kaichen at the agreed price of $117,000. This amount was borrowed from the bank pursuant to the above mentioned agreement, with the policy assigned as collateral.

On January 4, 1951, the National Bank of Detroit mailed the policy to the Penn Mutual Life Insurance Company, along with a letter requesting that the policy's cash surrender value be forwarded to the bank. The following day, January 5, 1951, Kaichen issued his check to Elsa Wineman for $117,000, and thereby satisfied the purchase price of the insurance policy. The cash surrender value of the policy, amounting to $117,330.14, was received by the bank on January 15, 1951. This amount was applied by the bank in payment of Kaichen's loan and the accrued interest thereon. The balance of $240.77 was then applied to Kaichen's special account.

At the date of acquisition of the annuity contract, January 6, 1933, Andrew Wineman made an initial payment of $10,000. Thereafter, deposits in variable amounts were made by Elsa Wineman. The last deposit was on March 4, 1949. Total payments on the policy aggregated $81,000, which was the cost basis of the contract at the time it was transferred by Elsa Wineman to Howard A. Kaichen.

Taxpayers Andrew and Elsa Wineman filed a point income tax return for the calendar year 1951. The sum of $36,000, being the difference between the cost of the policy and the $117,000 paid by Howard A. Kaichen for its transfer, was reported in the return as capital gain. Subsequently the Commissioner of Internal Revenue determined that such profit amounted to ordinary income. The additional taxes resulting from this determination were duly paid. Claims for refund were filed and later rejected by the Commissioner.

Eugene J. Arnfeld and Henry J. Moses are the duly appointed executors of the estate of Andrew Wineman, who died in 1954. Elsa Wineman died in 1952. Plaintiffs Eugene J. Arnfeld and Mortimer H. Meyer are the executors of her estate.

The Government initially challenges plaintiffs' contention that the profit realized upon the transfer of the annuity contract prior to maturity constitutes capital gain by denying that the transfer was a bona fide "sale or exchange" of property within the meaning of section 117(a) (4) of the 1939 Code.¹ The Government's argument that a bona fide sale or exchange did not take place can be summarized as follows: The transaction was one of accommodation between the National Bank of Detroit, Kaichen, and Andrew Wineman, with the bank and Kaichen acting as agents for Wineman for the purpose of transferring the annuity policy out of Wineman's hands and into the hands of a third party. Thus Kaichen was no more than a conduit through which the "form" of a sale took place.

However, we feel that the broad sweep of this objection, if sanctioned as to the instant facts, could strike at the heart of any sale or exchange. For it is not clear to us just what standards of "horse trading" the Government would have us impose on the business community before we could say that a valid and binding sale had occurred. At the least, it would require businessmen to strike a hard bargain. But such was done here. The bank realized interest on its loan to Kaichen. Kaichen was compensated for his part in the transaction. Further, the trial commissioner's report indicates that Kaichen, when he purchased the annuity policy from Elsa Wineman, was acting in his individual capacity and not as the agent of any company or person. We are satisfied, after examining the record, of the correctness of that determination (finding 11).

More specifically, the Government urges that we view the instant case against the factual background present in Lasky v. Comm'r, 1954, 22 T.C. 13, dismissed, 9 Cir., 1956, 235 F.2d 97 affirmed 1957, 352 U.S. 1027, 77 S.Ct. 594, 1 L.Ed.2d 598. In that case the taxpayer assigned his right in accrued royalties of $820,000 to United Artists for $805,000. A few days later United Artists released the right to Warner Brothers for $820,000, the amount of the accumulated royalties. The court rejected petitioner's claim that the receipts constituted capital gains, and held the amount received to be ordinary income. Prior to the assignment the taxpayer in Lasky could have collected the royalties at any time since they carried no maturity date with them. According to the Government's interpretation of that case, there was, therefore, no benefit derived by the taxpayer on the assignment, and such was the basis for the court's decision. Similarly here there was no benefit, argues the Government, derived by Wineman on the assignment of the annuity policy —as a matter of fact, assignment of the policy prior to maturity cost Wineman the difference between the maturity value and the sales price, i. e., $330.14. But assuming the Government's interpretation of the holding in Lasky is correct, it cannot be said that Wineman derived no benefit from the assignment of the annuity contract. For, as mentioned, above, a business purpose guided Andrew Wineman in his initial determination to dispose of the policy: the proceeds of such disposition were to be invested in securities yielding a higher rate of return. His method of disposition, however, in electing to sell the policy to a third person rather than surrender it to the issuing company for its cash surrender value was clearly designed to lessen his taxes.² But such is the legal right of a taxpayer. Gregory v. Helvering, 1935, 293 U.S. 465, 55 S.Ct. 266, 79 L. Ed. 596; Commissioner of Internal Revenue v. Tower, 1946, 327 U.S. 280, 66 S. Ct. 532, 90 L.Ed. 670.

Finally, we have no quarrel with the...