Gillespie v. Commissioner of Internal Revenue, 3123.

• Decision Date: 02 January 1946
• Docket Number: No. 3123.,3123.
• Citation: 151 F.2d 903
• Parties: GILLESPIE v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Tenth Circuit

151 F.2d 903 (1945)

GILLESPIE v. COMMISSIONER OF INTERNAL REVENUE.

No. 3123.

Circuit Court of Appeals, Tenth Circuit.

October 29, 1945.

Rehearing Denied January 2, 1946.

Harold E. Rorschach, of Tulsa, Okl. (Jack L. Rorschach, of Vinita, Okl., on the brief), for petitioner.

John F. Costelloe, of Washington, D. C. (Samuel O. Clark, Jr., Sewall Key, and J. Louis Monarch, all of Washington, D. C., on the brief), for respondent.

Before MURRAH, Circuit Judge, and RICE and SAVAGE, District Judges.

MURRAH, Circuit Judge.

The first question presented by this appeal is whether a judgment of the Tax Court involving amounts received by the taxpayer for the taxable year 1934, operates as an estoppel to the maintenance of this suit involving income of the taxpayer in subsequent years from the same source. The Tax Court held the taxpayer estopped by its former judgment, and that ruling, if correct, is dispositive of this appeal.

To effect an absolute division of community property, and to settle a suit for separate maintenance, the taxpayer, F. A. Gillespie, and his then wife, Maud Gillespie, entered into an agreement dated May 15, 1929. The agreement provided that the parties would, under a contract to be entered into with the F. A. Gillespie & Sons Company, a corporation, transfer the bulk of their community property to the Company, in consideration for which the Company would agree to pay them specified amounts for life. Pursuant to this agreement, property having an agreed fair market value of $1,464,240.22 was transferred to the Company, and the Company entered into a contemporaneous agreement with the two parties under which it agreed that in "part consideration" of the transfer of the property, it would pay the taxpayer and Maud Gillespie each $15,000 per year for life, and pay $10,000 per year to Maud Gillespie during her life as guaranteed dividends. Exclusive of the property transferred to the Company under the agreement, each of the parties retained $100,000 in cash and certain other real and personal property to be held by them individually, and the parties released each other reciprocally of all claims for support or inheritance, or any claim whatsoever against the property retained individually.

The F. A. Gillespie Company, to which the property was transferred, was a wholly owned family corporation, organized April 4, 1920, with a capital stock of $1,000,000, divided into 10,000 shares with a par value of $100 each. By a trust instrument executed February 9, 1921, 9,975 shares of the stock were transferred to F. A. Gillespie in trust for his wife and three children equally, and the remaining 25 shares were issued to the five members of the family equally. The trust by its terms was limited to the life of the last surviving beneficiary, and was made distributable among the surviving children or grandchildren of the trustor, or their heirs. On the death of the trustor within the trust period, the surviving children were entitled to the current distributions, and similarly on their death to the grandchildren. In sum, the stock of the Company was held by the taxpayer in trust for the benefit of the named beneficiaries and their heirs.

During the taxable year 1934, taxpayer received the $15,000 from the Company under the terms of the contract, and Maud Gillespie, from whom he was divorced on February 19, 1932, received $20,000. The taxpayer did not return any of the $15,000 as taxable income for that year, and the Commissioner determined a deficiency, based on the contention that the entire $15,000 received from the Company under the contract was an annuity and hence taxable to him under Section 22(b)(2) of the Revenue Act of 1934,¹ 26 U.S.C.A. Int.Rev. Code, § 22(b)(2), and also that the amounts received by Maud Gillespie under the agreement were in the nature of alimony in the discharge of his marital obligations, and were therefore taxable to him as such.

On petition to the Board for redetermination, taxpayer, pleading the contracts, contended that the $15,000 received by him for the taxable year 1934 from the Company was in part payment of property he and his wife had sold to the Company, and since he had not received his cost, the same was a tax free return of capital. In the alternative, it was contended that if the $15,000, or any part thereof, be subject to tax, then only such portion of it was taxable as represented 3 per cent of what an annuity would have cost on May 15, 1929 (date of the contract), sufficient to pay $15,000 per annum during the life of the taxpayer. The dates of birth of taxpayer and Maud Gillespie were alleged, together with the cost of an annuity purchased from a reputable insurance company sufficient to pay the $15,000 per year for their respective lifetimes. The constitutionality of Section 22(b)(2), as sought to be applied, was not directly challenged in the petition, but the point was raised in the taxpayer's brief and argument to the Board.

After finding the facts as substantially herein related, the Board recognized the two questions presented: (1) Was the $15,000 received by the taxpayer in 1934 an annuity taxable to him under Section 22(b) (2) of the Revenue Act of 1934, or a return of capital and if it be considered as an annuity whether only such portion thereof is taxable as equals 3 per cent of the cost of the same annuity, if purchased from a life insurance company — the taxpayer contending that any other application of the statute would be unconstitutional. (2) Was the $20,000 received by the taxpayer's wife during the year 1934 taxable to him as paid in discharge of his marital obligations.

The Board held² that by the terms of the contracts, the "consideration paid" for the annuities was the value of the property transferred to the F. A. Gillespie & Sons Company ($1,464,240.22), and since the statute taxed 3 per cent of the "consideration paid" for the annuities, there was no legal basis for the contention that the taxpayer was taxable only upon 3 per cent of an amount actuarially sufficient to purchase the same annuities from an insurance company; that since 3 per cent of the consideration paid greatly exceeded the amount actually received as annual annuities, there could be no excludable returns under the statute. On the constitutional question, the Board was of the opinion that the statute, as thus applied, was not unconstitutional simply because the "consideration paid" for the annuities was in excess of what they would have cost if purchased on an actuarial basis. In sum, the Board held that the entire $15,000 was not a return of capital, but was taxable as an annuity under Section 22(b)(2), and as thus applied the statute was not unconstitutional. The Board further held that the $20,000 received by the taxpayer's wife under the contract was her separate income and taxable as such.

Again in his returns for the taxable years 1936, 1937 and 1938, the taxpayer treated the $15,000 received under the same contract as non-taxable, and the Commissioner, following the decision of the Board, assessed deficiencies accordingly, whereupon the taxpayer commenced this suit in the...