Arnold v. United States

• Citation: 180 F. Supp. 746
• Decision Date: 30 December 1959
• Docket Number: Civ. A. No. 2622.
• Parties: Arthur F. ARNOLD and Beckie Arnold v. UNITED STATES of America.
• Court: U.S. District Court — Northern District of Texas

180 F. Supp. 746

Arthur F. ARNOLD and Beckie Arnold v. UNITED STATES of America.

Civ. A. No. 2622.

United States District Court N. D. Texas, Amarillo Division.

December 30, 1959.

Arthur Glover, Amarillo, Tex., for plaintiffs.

Chas. K. Rice, Asst. Atty. Gen., W. B. West III, U. S. Atty., Fort Worth, Tex., for defendant.

DOOLEY, District Judge.

Facts

The plaintiffs Arthur F. Arnold and Beckie Arnold are husband and wife. He was born May 4, 1886. Under date of November 3, 1937, the said husband obtained an endowment policy and again under date of November 3, 1941, obtained another such policy, both in equivalent terms, from the Southwestern Life Insurance Company, including a life insurance part in which said wife was the named beneficiary, for the sum of $5,000.00, or the cash value of the policy, whichever might be greater, effective only for the interim between the dates of said policies and the maturity thereof, set to be November 3, 1951. In event said husband lived to the maturity date of said policies, he would then, in his sixty-fifth year of life, become the exclusive owner, entitled to all the benefits of the policies, except for the contingent possibility that the wife could come in as a beneficiary again, under provisions that the Company would either (1) pay $50.00 on each policy to the husband on said maturity date and a like amount monthly thereafter so long as the husband continued to live, with the proviso that if he should die before having received such payments for one hundred and twenty (120) months, the payments for the remainder of such ten year period would be made as they respectively became due to his wife, or else (2) the husband at such maturity date could elect to receive payment of the cash value of the policies in lieu of the monthly income payments aforesaid.

The husband, at the maturity date of said policies, elected to accept from the Company two life income agreements, in identical terms, bearing even date with the maturity of the pre-existing policies, in satisfaction of the Company's obligations under such policies and, conforming with the terms of the policies, each of said agreements provided for monthly payments of $50.00 for the guaranteed period of one hundred and twenty months, and thereafter so long as the husband might live. The most crucial provision in said contracts is from his written election and quoted, as follows:

"I reserve to myself the right on any anniversary date of the agreement issued pursuant to this request to withdraw the commuted value of the unpaid payments for the remainder of the guaranteed period calculated on the basis of interest at the guaranteed rate hereinbefore specified, and in the event I make such withdrawal, then the monthly payments herein provided for shall cease for such remaining portion of the guaranteed period, but shall be resumed on the third day of November 1961 if I am then living, and continue so long thereafter as I shall live."

The said husband thereafter and pursuant to the reserved commutation option quoted above, but after having received the stipulated monthly payments for three years elected, effective November 3, 1954, to receive a lump commuted payment in lieu of the specified monthly payments for the remaining seven (7) years of the aforesaid guaranteed period of ten years or 120 months. The Company then paid him the amount of $7,440.56, as the aggregate commuted value payable for the remainder of said guaranteed payments upon the two contracts aforesaid.

The husband paid total premiums of $13,598.15 to the Company on the two endowment policies which matured on November 3, 1951, and at said maturity date the policies had a total cash value of $13,740.00, which was liquidated in exchange for the two life income agreements. In their 1954 Income Tax Return the plaintiffs husband and wife claimed a deduction for an alleged loss precipitated by the husband's commutation choice aforesaid in the transaction which began with the purchase of the two endowment policies and was then folded into the two life income agreements, and undertook to sustain the contention under the terms of the Internal Revenue Code of 1954, Title 26, § 165(a), (c) (2), reading, as follows:

"(a) General rule—There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise. * * *

"(c) Limitation on losses of individuals—In the case of an individual, the deduction under subsection (a) shall be limited to—* * *

"(2) Losses incurred in any transaction, entered into for profit, though not connected with a trade or business."

In calculating the alleged loss, the plaintiffs in their return took as the initial cost of the two agreements an amount equal to the total premiums paid on the two endowment policies, that is $13,598.15, and then adjusted that amount downward, by reason of certain factors it is not necessary to here detail, until the remaining so-called investment value becomes $9,952.50, from which is deducted the commutation payment of $7,456.26 (which apparently should have been $7,440.56) leaving the alleged loss of $2,496.24. The plaintiffs by amended pleading have raised their claim to $3,588.24. In computing said asserted loss, the plaintiffs take no consequential notice of the fact that the Company is still obligated to the plaintiff husband to resume monthly payments of $100.00 under the two agreements together on November 3, 1961, if he is then alive, and continue same so long thereafter as he shall live. In event he does live until November 3, 1961, he will at that time have a remaining life expectancy of 6.2 years. The Commissioner has rejected the loss claimed and determined a deficiency in income tax against the plaintiffs for said year in the sum of $1,050.60 plus interest of $160.09 or a total of $1,210.69. The plaintiffs paid said deficiency and their claim for refund having been disallowed, this suit was filed.

Legal Questions

The two controlling legal questions are (1) whether the transaction in question was entered into by the plaintiff husband for profit, and if so (2) whether or not the husband, or both he and his wife, have actually sustained any loss as claimed. These points will be discussed in that order.

Opinion

The action of the Commissioner was presumably proper under the law and the burden of proof is on the plaintiffs to overcome the prima facie propriety of disallowing the loss claimed. It is, at least, doubtful that the husband was actuated by any primary purpose of profit when he obtained the two endowment policies. In the first place, there was very little prospect of profit in the ordinary sense of that term and any potential profit was very little in amount. This is illustrated by the fact that when the endowment policies matured the cash value of same exceeded the aggregate premiums paid by only $141.85. That would have been trivial incentive to a profit-seeker. Furthermore, when the husband elected to take the commutation value of $7,440.56, that amount plus the $3,600.00 he collected in monthly payments during the first three years of the guaranteed period of ten years was the full and final receipts he could muster up to that point against the total premium outlay of $13,598.15, thus leaving a deficit of $2,557.59. Of course, he also had the earning value of the commutation in money, but there is no proof of what use he made with it in this record and, besides, what he may have made out of it by his own efforts would not have been any profits on his insurance investment from the Company. This state of things was not fortuitous at all. It was predetermined just how much premium cost the husband would have in the transaction if the endowment policies ran to their maturity date and what the cash value thereof would be at that time. Likewise, the commutation value of the guaranteed period of ten years under the life income contracts could have been ascertained, so far as this record indicates, at the inception of the transaction. In other words, all of what has happened could have been predetermined. The plaintiff husband to the present time has received everything he bargained for in this transaction and it would strain good reason to say that a shrinkage incidental to the agreed operation of a lawful contract could be translated into a loss deductible under the income tax law. In contrast, as it turns out, had the husband kept the payments due him on the monthly payment basis, as specified, instead of electing to take a commutation payment, sixty monthly payments of $100.00 each, or $6,000.00, would have been collected now in addition to the $3,600.00 monthly payments which were collected, making the full amount $9,600.00, with twenty-four months still left of the guaranteed period of ten years. It follows that, if the husband lives said twenty-four months and should be paid the monthly installments meanwhile, his returns would then better that realized by his commutation decision. It is not too much to say that the husband in the exercise of his best judgment between alternatives in a fair sense invited what is now an alleged loss, even though that consequence may have been offset in his mind by what he regarded as some compensating advantage. The most plausible explanation is that the plaintiff husband, who was fifty-one years old at the time he obtained the first one and fifty-five years old at the time he obtained the second endowment policy, more than likely was then primarily interested in having some insurance benefits for his wife, if he should die during the term of such policies, and then at the maturity of the endowment policies, when he had become sixty-five years old, he was primarily interested in a definite and reliable security of some income certain during his later years. The finding is made that he did not enter into the transaction in question primarily with a profit object.

The impediment to demonstrating...