Dunigan v. United States

• Decision Date: 23 November 1970
• Docket Number: No. 28993.,28993.
• Parties: James B. DUNIGAN, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant. Sally I. DUNIGAN, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

434 F.2d 892 (1970)

James B. DUNIGAN, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

Sally I. DUNIGAN, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 28993.

United States Court of Appeals, Fifth Circuit.

November 23, 1970.

Johnnie M. Walters, Asst. Atty. Gen., Lee A. Jackson, Atty., Tax Div., U. S. Dept. of Justice, Washington, D. C., William W. Guild, Daniel B. Rosenbaum, Atty., Tax Div., U. S. Dept. of Justice, Fort Worth, Tex., Eldon B. Mahon, U. S. Atty., Fort Worth, Tex., Daniel B. Rosenbaum, Atty., Dept. of Justice, Washington, D. C., defendant-appellant.

Whitfield J. Collins, William L. Hughes, Jr., Harry E. Bartel, Fort Worth, Tex., for plaintiff-appellee.

Before COLEMAN, AINSWORTH, and GODBOLD, Circuit Judges.

COLEMAN, Circuit Judge.

James B. Dunigan and Sally I. Dunigan seek refund of certain gift taxes assessed against them and paid the Commissioner of Internal Revenue. Both are named as plaintiffs because they elected to split their gifts for gift tax purposes in the year 1961. The taxes were on amounts that the Commissioner determined to be gifts to certain trusts created by James B. Dunigan in 1961 and from which he received annuity contracts. The taxes were collected in 1967. Taxpayers timely filed claims for refund, with interest. The Commissioner disallowed in full their claims and Taxpayers filed suit in the District Court for a refund of such taxes and interest. The suit alleged that the Commissioner's determination as to the amount due was erroneous in that his requiring the use of Table I set forth in § 25.2512-5(f) of the Gift Tax Regulations as the sole basis for valuing the private annuity contracts was arbitrary, unreasonable, and erroneous. The jury returned its verdict in the form of answers to special interrogatories and in favor of Taxpayers. The Court entered its judgment accordingly and the Commissioner appealed.

In 1961, James B. Dunigan (Taxpayer) created five trusts for the benefit of his wife and three children. During the same year Taxpayer and his wife created three additional trusts for the benefit of his children. On June 1, 1961, cash, oil and gas royalties and leasehold interests of the total value of $111,568.51 were transferred to the trusts by Taxpayer. This gift is not in issue in this case.

On July 1, 1961, Taxpayer transferred certain corporate stocks of the aggregate value of $642,946.92 to the eight trusts. In exchange for this transfer he received an annuity contract from each trust, providing in the aggregate for monthly annuities payable to Taxpayer of $5,000 per month or $60,000 per annum.

In making adjustments to the Taxpayer's gift tax liability for the year 1961, the Commissioner determined that the value of the annuity contracts received by Taxpayer should be determined for gift tax purposes by Table I set forth in § 25.2512-5(f) of the Gift Tax Regulations. Using this table the Commissioner determined that on the basis of Taxpayer's age (69) at the time of the exchange, and adjusting the annuity factor shown in such table for an annual annuity (8.1578) to take into consideration the monthly annuities provided in the annuity contracts here involved, the value of the annuity contracts received by Taxpayer was $497,250.54, which was $145,698.21 less than the fair market value of the securities transferred in exchange for the annuity contracts. The gift tax deficiencies assessed against Taxpayer resulted from the determination that Taxpayer made a gift of $145,698.21 when he exchanged the securities for the annuity contracts.

At trial the Judge posed the following three interrogatories to the jury, to which the jury replied in the affirmative.

INTERROGATORY NO. 1

Do you find from a preponderance of the evidence that the transfer of corporate stocks by James B. Dunigan on July 1, 1961, to the eight trusts in exchange for private annuity contracts was a transaction which was bona fide, at arm\'s length, and free from any donative intent on the part of Mr. James B. Dunigan?

INTERROGATORY NO. 2

Do you find from a preponderance of the evidence that it was arbitrary, unreasonable, and erroneous for the Commissioner to require the use of Table I set forth in Section 25.2512(f) of his Gift Tax Regulations, which is set forth below, as the sole basis for valuing the private annuity contracts issued by the trusts to James B. Dunigan on January 1, 1961?

INTERROGATORY NO. 3

Do you find from a preponderance of the evidence that the value of the private annuity contracts issued by the trust to James B. Dunigan on July 1, 1961, was substantially equal in value to the securities which he transferred to such trusts in exchange for the annuities?

After the jury affirmatively answered the above interrogatories the Government moved for judgment notwithstanding the verdict or, in the alternative, for a new trial. The motion was denied. In a memorandum order the Judge stated that, in the event the reviewing court should hold that Interrogatory No. 2 should not have been submitted to the jury, the District Court would have found as a matter of law that it was arbitrary, unreasonable, and erroneous for the Commissioner to require the use of Table I as the sole basis for valuing the annuity contracts. The Government appeals.

The issue to be decided by this Court is whether or not the jury had before it sufficient evidence to support their verdict, rendered in the form of their affirmative answer to Interrogatory No. 2, that the required use by the Commissioner of his Table I as the sole means for valuing Taxpayers annuity contracts was arbitrary, unreasonable, and erroneous.

The jury as a matter of fact so found. The District Court agreed.

The Government argues that the determination by either the court or the jury was without basis because the Taxpayer's only proof consisted of testimony by Taxpayer's expert actuary, T. T. Chamberlain, that Table I valued the annuities at significantly lower values than did certain commercial annuity contracts issued by insurance companies.

The cost of commercial annuity contracts is not a valid singular basis for determining the value of a private annuity contract as in this instance. There are differences between the values and costs of commercial and private annuity contracts. Commercial issuers are restricted as to the types of investments they can make and to lower interest rates, whereas the private issuer may speculate more and obtain a higher return; commercial issuers' prices include a margin for profit and expenses called a "loading factor"; and commercial annuitants, as a general class, are wealthier and longer lived, therefore an annuity contract given a commercial annuitant would be of greater value than one issued a member of the general population.

The above factors operate to make the cost of a commercial annuity contract greater than the cost of private annuity contracts giving comparable periodic payments. Furthermore, insurance companies (issuers of commercial contracts) have far greater assets than those of most trusts, including the eight instant trusts, another factor which makes a commercial annuity contract worth more than a private one because of the more positive certainty of payment. Because of these differences the Commissioner uses Table I to value private annuities rather than a table used by commercial life insurance companies.

Table I is a composite, general purpose, valuation table, based on a population mortality table compiled in 1939 by the Bureau of the Census.

Taxpayer offered testimony and records which established that he was a wealthy man, that at the time of the transaction in question he was in excellent physical condition for a man his age, and that his life expectancy was greater than that of a man his age as a member of the general population. Part of Taxpayer's contention was that he, as a private annuitant, should be classified with commercial annuitants in determining life expectancy and further that the use of Table I when applied to him was erroneous since Table I was based on the mortality of the general population. It made no distinction as to a man of his particular wealth, physical condition, and longer life expectancy. Had this been the only evidence offered by Taxpayer, he would fall squarely within the cases cited below and could not prevail in this Court.

In Dix v. Commissioner, 4 Cir., 1968, 392 F.2d 313, the taxpayers received corporate stock from their mother and in exchange promised to...