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In Samuel v. Commissioner, 306 F.2d at 687, the Court of
Appeals for the First Circuit summarized the essential substance
of a true annuity transaction as follows:
Inherent in the concept of an annuity is a transfer of
cash or property from one party to another in return
for a promise to pay a specific periodic sum for a
stipulated time interval. As such, an annuity contract
gives rise to a debtor-creditor relationship between
the transferee and transferor. * * * [O]nce the
annuitant has transferred the cash or property to the
obligor and has received his contractual right to
periodic payments, he is unconcerned with the ultimate
disposition of the property transferred once it is in
the obligor’s hands. * * *
In this case, the Melniks treated the stock sale proceeds that
should have been invested to preserve and ensure Clend’s ability
to pay the annuities as a personal line of credit, which they
used freely to finance real estate investments in the United
States. They did not act like annuitants whose only claim was to
periodic payments beginning sometime in the future. Although
Bermuda Trust purported to be an independent trustee of the
foreign trusts that owned and controlled Clend, the entity
obligated to make the annuity payments, Bermuda Trust not only
gave the Melniks virtually unlimited access to Clend’s assets but
failed to take action when the Melniks defaulted on the $900,000
loans.
All of the facts summarized above undermine the credibility
of petitioners’ case43 and contribute to our conclusion that
43Petitioners argue that, because respondent did not call
(continued...)
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