Flarsheim v. United States, 13258
| Decision Date | 01 August 1946 |
| Docket Number | 13259.,No. 13258,13258 |
| Citation | 156 F.2d 105 |
| Parties | FLARSHEIM v. UNITED STATES (two cases). |
| Court | U.S. Court of Appeals — Eighth Circuit |
Milton H. Tucker, of St. Louis, Mo. (Lewis, Rice, Tucker, Allen & Chubb, James A. Singer, and Stanley H. Sicher, all of St. Louis, Mo., on the brief), for appellant.
Harry Marselli, Sp. Asst. to Atty. Gen. (Sewall Key, Acting Asst. Atty. Gen., A. F. Prescott, Sp.Asst. to Atty. Gen., Harry C. Blanton, U. S. Atty., of Sikeston, Mo., and Russell Vandivort, Asst. U. S. Atty., of St. Louis, Mo., on the brief), for appellee.
Before GARDNER and THOMAS, Circuit Judges, and DUNCAN, District Judge.
These are appeals by a taxpayer from judgments for the United States in two actions brought for the recovery of personal income taxes alleged to have been erroneously and illegally collected for the years 1933 and 1934 respectively. Except as to a small difference in the amount of the taxes for each year the facts are the same in both cases. They are submitted here together and may be disposed of in a single opinion.
In her income tax returns for the years 1933 and 1934 Jennie C. Flarsheim, the taxpayer, reporting her gross income, included as received each year under Item 1:
She paid the resulting taxes in the amounts of $862.85 and $826.30 and thereafter filed claims for refunds thereof. The claims were denied by the Commissioner of Internal Revenue and these actions followed.
The taxpayer is the widow of Milton J. Flarsheim of St. Louis, Missouri, who died on April 27, 1931. From about 1901 until the time of his death he was, subject to the contracts referred to below, an employee of Seavey & Flarsheim Brokerage Company, a corporation engaged in the foods brokerage business with numerous branch offices in cities throughout the middle west. Milton J. Flarsheim was employed as manager of the branch office at St. Louis until the end of 1915. Beginning with 1916 he operated the office as his own under an oral contract with the corporation, retaining all the profits and taking all the losses. While working under the oral agreement he used the corporation's name and its statistical and transportation facilities for which he paid.
In 1928 Milton J. Flarsheim, then 60 years of age, became dissatisfied with his arrangement with the corporation and contemplated cancelling his oral contract with them and going into business for himself. He was an outstanding salesman and contact man. While operating the St. Louis business as his own he performed valuable services for the corporation and procured for it many clients. As a result of negotiations a contract between him and the corporation for his continued services was entered into on September 13, 1928. The contract provided for the conduct of the business as it had been previously carried on under his management, further provided for the payment of the net earnings of the St. Louis office to him in case of his disability and that in the event of his death $12,000 in equal monthly installments be paid each year to his wife, Jennie C. Flarsheim, so long as she lived. The contract also provided that in case the net earnings of the St. Louis office in any year did not equal the sum of $12,000, the deficit would be made up in subsequent years. The provisions of the contract important in this case are set out in the footnote.1
Since its execution the contract has been performed, and since the death of Milton J. Flarsheim in 1931 the corporation has paid the appellant the sum of $12,000 each and every year. The payments received by her in 1933 and in 1934 and returned by her as income give rise to the problem presented on these appeals.
The appellant's contentions are (1) that the $12,000 received by her from the corporation in the years 1933 and 1934 did not constitute income within the meaning of § 22(a) of the Revenue Acts of 1932 and 1934; but (2) if the payments are to be construed as income under the statute, they are not taxable to her.
Section 22(a) of the Revenue Act of 1932, c. 209, 47 Stat. 169, 26 U.S.C.A. Int. Rev.Code, § 22(a), reads: "`Gross income' includes * * * gains or profits and income derived from any source whatever, * * *." Subsection (b) (2) provides that annuities to the extent stated shall be excluded. And subsection (b) (3) excludes from gross income "The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income)."
Counsel for appellant recognizes that the $12,000 annual payments made under the provisions of the contract of September 13, 1928, were paid "out of the net earnings of the said St. Louis office"; but he argues that the payments did not constitute income to the appellant; and that the "net earnings" of the St. Louis office were merely a yardstick for determining the amount of the annual payments. The significant facts to which counsel directs attention are that beginning with 1916 Flarsheim operated the St. Louis office "as his own"; and that he entered into the contract in 1928 for the purpose of making "monetary provision * * * for his wife for her lifetime subsequent to the death of the "second party" and for himself "in the event of his disability." Appellant's conclusion is that when interpreted in the light of the foregoing facts the contract of September 13, 1928, was in effect a paid-up annuity; "that the payments received by Appellant were installments of a capital sum to which Appellant acquired her right when the contract was entered into in 1928."
That the payments made pursuant to the contract of 1928 are not annuities within the meaning of the statute can not be doubted. In 2 Am.Jur., Annuities, § 3, annuities are distinguished from income as follows:
This court had occasion to apply the foregoing rule to payments made under a contract very similar to the one here involved in Bettendorf v....
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