Appeal from the United States Board of Tax Appeals.
Before L. HAND, AUGUSTUS N. HAND, and CHASE, Circuit Judges.
AUGUSTUS N. HAND, Circuit Judge.
The parties to this proceeding stipulated that the controversy should be submitted to the Board of Tax Appeals on the pleadings. Subsequently an additional stipulation of facts was filed. According to these stipulations, it appears that the petitioner is the widow of I. De Ver Warner, who died a resident of Bridgeport, Conn., on January 11, 1913, leaving a will and codicils thereto, which, as duly probated, are attached to the petition in the present case. The provisions of the will pertinent to this controversy are as follows:
"Fifth: I give and bequeath to my Trustees named in this will Fifteen hundred (1500) shares of the capital stock of the Bridgeport Hydraulic Company, Five Hundred (500) shares of the capital stock of the New York, New Haven and Hartford Railroad Company, Five hundred (500) shares of the capital stock of The Warner Brothers Company, Two hundred thousand dollars ($200,000) par value of first mortgage bonds bearing interest at a rate not less than four per cent. per annum, in trust, nevertheless, to hold, invest and reinvest in safe and conservative investments, and from the dividends, interest income and increase thereof to pay over to my wife during the term of her natural life, annually, in quarterly payments, the sum and amount of Twenty-five thousand (25,000) dollars. * * *
"If I should not own at my decease the amount and description of bonds and stocks in this item specified, I direct my Executors to procure the same, or other safe and conservative investments of such character and amount as in their judgment will most likely produce a reliable income for the regular payment of the annuity to my wife herein provided for, by the sale of such portions and items of my estate as they shall deem most judicious, to the end that the same may be held and devoted to the purposes specified in this item.
"The provisions made in this will for my wife shall be in lieu of her statutory share in my estate. * * *
"Ninth: It is my will that the annuity provided for my wife in the Fifth item of this will shall be paid to her out of the income of the trust property held for that purpose if it be sufficient, but, if insufficient, then I hereby direct and authorize my Trustees to take from the principal of said trust fund a sufficient sum to make up the deficiency so that, at all events, and every year, my said wife shall receive the full sum and amount of Twenty-five thousand (25,000) dollars."
Subsequent codicils increased the amount of the annuity to $50,000, but the provisions for its payment were otherwise unchanged. Upon the death of the testator, the petitioner elected to accept the provisions for her benefit under the will in lieu of exercising her right of dower under the law of Connecticut, and she has received an annuity payment of $37,500 for the year 1913, and payments of $50,000 since that time. In reporting her federal income tax for the years 1927 and 1928, the petitioner did not include any amount on account of the annuity payments received in those years. The respondent, in computing the alleged deficiencies for the years 1927 and 1928 included the annuity payments, properly divided between dividends and other income, and accordingly determined deficiencies of $4,740.69 and $4,339.53 for those years respectively. The inclusion of the annuity payments is computing the petitioner's gross income is the basis of the present controversy.
Section 213 of the Revenue Act of 1926 (26 U.S.C. § 954 [26 USCA § 954] and section 22 of the Revenue Act of 1928 (26 U.S.C. § 2022 [26 USCA § 2022]), are the statutory provisions governing computation of gross income for the years in question. The former act provides in part that:
"(b) The term 'gross income' does not include the following items, which shall be exempt from taxation under this title: * * *
"(2) Amounts received (other than amounts paid by reason of the death of the insured and interest payments on such amounts) under a life insurance, endowment, or annuity contract, but if such amounts (when added to amounts received before the taxable year under such contract) exceed the aggregate premiums or consideration paid (whether or not paid during the taxable year) then the excess shall be included in gross income. * * *
"(3) The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income). * * *"
The corresponding provisions of the act of 1928 are not materially different. The taxpayer contends that the annuity payments constituted property acquired by bequest, and therefore should not ...