Before HASTINGS, Chief Judge, and SCHNACKENBERG and KNOCH, Circuit Judges.
The petitioners, Maxwell B. Llewellyn and Gertrude Llewellyn, his wife, seek review of the Tax Court's decision sustaining the Commissioner's determination of deficiencies and additions respecting petitioners' income taxes for the years 1953 and 1954. Mrs. Llewellyn is a party only because she and her husband filed joint returns.
Dr. Maxwell B. Llewellyn entered into written agreements (which were in effect during the taxable years in question) with Fort Atkinson Hospital, Fort Atkinson, Wisconsin, and Mercy Hospital, Janesville, Wisconsin, to perform services for these two hospitals as a pathologist and as director of their clinical and pathological laboratories. Under these agreements, Dr. Llewellyn was to receive a stated percentage (30% at Fort Atkinson Hospital and 25% at Mercy Hospital) of the monthly gross receipts of their laboratories, subject to certain adjustments which are not pertinent here. The Fort Atkinson agreement provided for a set period, automatically renewable and subject to termination by either party on 90 days' notice. The Mercy agreement was to be effective as long as Dr. Llewellyn performed his duties under its terms.
Under amendments executed in December, 1953, both hospitals agreed to subtract stated sums from the percentage of the monthly gross receipts otherwise due Dr. Llewellyn for November and December, 1953, and for all subsequent months (unless otherwise amended) and to remit these sums directly to Phoenix Mutual Life Insurance Company of Hartford, Connecticut, at its Milwaukee office, for purchase of a retirement income annuity policy, for such other annuity contracts as the subtracted sums would provide, and for payment of premiums on existing contracts. These sums were to go directly to Phoenix Mutual. Dr. Llewellyn was to be the sole owner and beneficiary under the annuity contracts, and the hospitals were to notify Dr. Llewellyn if payments were not made and to advise him of the reasons for any such non-payment.
The hospitals made the agreed deductions and sent the sums to Phoenix Mutual during the years in question. Phoenix Mutual issued retirement income annuity policies to Dr. Llewellyn in response to applications made by Dr. Llewellyn as the proposed insured. The policies were sent to Dr. Llewellyn who retained them in his possession, custody and control, until 1956 when he assigned them to a bank as collateral for a loan. The remittances made by the hospitals to Phoenix Mutual were not reported as income to Dr. Llewellyn.
Before the amendment was executed, Dr. Llewellyn's attorney wrote to Sr. Mary Mira, R.S.M., Superior of the Provincial House and member of the governing board of Mercy Hospital, that Dr. Llewellyn wished part of the moneys due him from Mercy Hospital to be paid directly to Phoenix Mutual for purchase of an annuity contract, and that:
"* * * All of these amounts, of course, are to be credited by the hospital against sums that otherwise would be owing and payable directly to the pathologist under his existing contractual basis for compensation."
Dr. Llewellyn's attorney also advised Sr. Mary Mira that he knew of no possible liability to which Mercy Hospital might be exposed by paying premiums directly to the insurance company at Dr. Llewellyn's request, but that to avoid any question with respect thereto, a release and indemnity agreement from Dr. Llewellyn to the hospital had been prepared to save the hospital harmless in this procedure of paying Dr. Llewellyn's compensation under his contract. Dr. Llewellyn contends that as his employers, the two hospitals purchased annuity policies for him, within the purview of the provisions of Section 22(b) (2) (B), Internal Revenue Code of 1939,*fn1 and Section 403(a) (1), Internal Revenue Code of 1954.*fn2
Dr. Llewellyn argues that by virtue of the December, 1953, amendments to his employment contracts with the two hospitals, his compensation under those contracts was decreased by the amount of the deductions and that the annuity policies here involved were paid for by his employers. The Commissioner's position is that Dr. Llewellyn's compensation under the contracts was not reduced; that at his request a portion of his compensation was diverted in accordance with his directions. Hence the sums paid to Phoenix Mutual were payments made, in effect, by Dr. Llewellyn himself. The cited sections of the Revenue Codes of 1939 and 1954, supra, apply only to sums contributed by an employer out of its own, not the employee's funds. These sections do not apply to amounts paid by the employer out of employee's compensation, at the employee's direction.
This very question was considered in Zeltzerman v. C.I.R., 34 T.C. 73, 82, affirmed per curiam, 1 Cir., 1960, 283 F.2d 514. In that case, the Tax Court held:
"We think it obvious that in legislating with respect to annuity contracts purchased by exempt employers, Congress had in mind the usual type of annuity purchased by an employer out of its funds or by use of its funds and also contributions made by the employee. Of course, any contributions made by the employee would first have constituted taxable income to the employee. [Citing cases]"
The amounts deducted from Dr. Llewellyn's percentage of the gross receipts and paid out, at his direction, to Phoenix Mutual, were not employers' contributions, but were income constructively received by Dr. Llewellyn and as such constituted taxable income to him.
Dr. Llewellyn attempts to distinguish the Zeltzerman case on the basis of slight changes in fact in that Dr. Llewellyn had a written contract of employment, which was amended by a written instrument, and that he gave up the right, for the duration of the term of the contract as amended, to receive any of the withheld money or to change the amounts designated for purchase of annuity policies. We do not agree that any of these elements affect the basic principle that in the Zeltzerman ...