Opinion
Docket Nos. 53701 53702.
1957-04-12
HENRY E. PRUNIER AND WINIFRED L. PRUNIER, HUSBAND AND WIFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.JOSEPH E. PRUNIER AND ROSE Z. PRUNIER, HUSBAND AND WIFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
George B. Lourie, Esq., for the petitioners. Frank V. Moran, Jr., Esq., for the respondent.
George B. Lourie, Esq., for the petitioners. Frank V. Moran, Jr., Esq., for the respondent.
During the taxable year a corporation, of which Joseph and Henry were substantially the sole stockholders, paid premiums on policies of insurance totaling $45,000 on their respective lives. The corporation did not take a deduction in its income tax return for the premiums but debited its surplus account with the amount of them. The corporation was not named within the taxable year, either in the policies or by endorsements thereto, as beneficiary of the policies. Henry was named beneficiary of the policies on Joseph's life and Joseph was named beneficiary of the policies on Henry's life. In some of the policies on Joseph's life, Henry had the exclusive right to change the beneficiary and in some of the policies on Henry's life, Joseph had the exclusive right to change the beneficiary. Agreements entered into by Joseph and Henry late in 1946 and in November 1950 provided that upon the death of either, the proceeds from the policies on the life of the deceased should be used by the corporation to purchase stock of the deceased in the corporation. The value provided in the agreement of November 1950 at which the stock of the deceased should be purchased was substantially in excess of $45,000, the amount of insurance on the life of each. Held, that the corporation was not a beneficiary of the policies of insurance but that Joseph and Henry were the beneficiaries. Held, further, that the respondent properly included in the taxable income of each the amount of the life insurance premiums paid by the corporation on the policies on his life.
The respondent determined deficiencies in 1950 income tax of Henry E. and Winifred L. Prunier of $),080.88 and of Joseph E. and Rose Z. Prunier of $1,348.98. The only issue is whether the premiums on insurance policies on the lives of the male petitioners paid by a corporation of which they were substantially the sole stockholders were income to them.
FINDINGS OF FACT
Some facts were stipulated and found accordingly.
Henry is president and treasurer and his brother, Joseph, is vice Worcester, Massachusetts, where Joseph E. and Rose Z. Prunier, husband and wife, also reside. Both couples filed joint individual income tax returns with the collector of internal revenue for the district of Massachusetts.
Henry is president and treasurer and his brother Joseph is vice president of J. S. Prunier & Sons, Inc., hereinafter referred to as the corporation. During the taxable year the corporation's outstanding stock consisted of 450 shares of common stock of a par value of $100 each. Joseph and Henry each owned 220 shares, and Irene M. Prunier, their cousin, owned the remaining 10 shares.
On July 6, 1942, Joseph applied to an insurance company for a $5,000 policy on his life, with Henry designated as beneficiary and all rights to be shared by the two jointly. On July 9, 1942, the insurer issued to Joseph a ‘Preferred Risk Modified Life Policy’ of $5,000 on his life, with Henry as beneficiary. An endorsement dated January 31, 1947, reserves to Henry the exclusive right to change the beneficiary, if living; if not, to Joseph. An endorsement dated May 9, 1952, designates the corporation as beneficiary and Henry, his executors, or administrators, as possessor of the exclusive right to change the beneficiary.
On July 6, 1942, Henry applied to the same insurer for a $5,000 policy on his life, with Joseph as beneficiary and all rights to be shared jointly. On August 3, 1942, the insurer issued to Henry a $5,000 ‘Life Paid Up At Age 85 Policy’ on his life, with Joseph as beneficiary. An endorsement dated January 29, 1947, gives to Joseph, if living, the exclusive right to change the beneficiary; if not, to Henry. A May 5, 1952, endorsement designates the corporation as beneficiary and gives Henry the exclusive right to change the beneficiary.
On December 23, 1946, Joseph and Henry each applied to the insurer for a $5,000 policy on his life, designating his brother as beneficiary, with all rights to be shared jointly by beneficiary and insured. On December 31, 1946, the insurer issued to Joseph a $5,000 ‘Life Paid Up At Age 85 Policy’ designating ‘Henry E. Prunier Sons, Inc., brother,‘ as beneficiary. An endorsement dated January 29, 1947, designates Henry as beneficiary and gives the exclusive lifetime right to change the beneficiary to Henry; if not living, to Joseph. An endorsement dated May 9, 1952, designates the corporation as beneficiary and gives Henry, his executors, or administrators, the exclusive right to change the beneficiary. On January 14, 1947, the insurer issued to Henry a $5,000 ‘Life Paid Up At Age 85 Policy’ designating Joseph as beneficiary. An endorsement dated January 29, 1947, gives the exclusive lifetime right to change the beneficiary to Joseph; if not living, to Henry. An endorsement to the policy dated May 5, 1952, designates the corporation as beneficiary and gives the exclusive right to change the beneficiary to the insured.
On December 23, 1946, each brother applied to the insurer for $5,000 policies on his life with all rights to be shared by the insured and the beneficiary. Joseph's application designated ‘Henry E. Prunier Sons, Inc., brother’ as beneficiary while Henry designated Joseph. On January 22, 1947,
the insurer issued to each brother a $10,000 ‘Life Paid Up At Age 85 Policy’ naming his brother as beneficiary. An endorsement dated May 9, 1952, to the policy issued to Joseph designates the corporation as beneficiary, and Henry, his executors, or administrators, as the possessor of the exclusive right to change the beneficiary. An endorsement dated May 5, 1952, to the policy issued to Henry designates the corporation as beneficiary and reserves the exclusive right to change the beneficiary to Henry.
In the case of the policy issued to Joseph, the stipulated date of January 22, 1946, is apparently erroneous.
On November 2, 1950, each brother applied to the insurer for a $25,000 policy on his life, naming his brother as beneficiary. On November 30, 1950, and December 8, 1950, the insurer issued to Henry and Joseph, respectively, a $25,000 ‘Life Paid Up At Age 85 Policy’ designating the insured's brother as beneficiary. An endorsement dated May 9, 1952, to the policy issued to Joseph designates the corporation as beneficiary, and Henry, his executors, or administrators, as possessor of the exclusive right to change the beneficiary. An endorsement dated May 5, 1952, to the policy issued to Henry designates the corporation as beneficiary and reserves the exclusive right to change the beneficiary to Henry.
Joseph and Henry have never maintained a partnership relationship between them. No corporation named ‘Henry E. Prunier Sons, Inc.,‘ has ever existed.
The corporate minute book contained the following agreement executed by Joseph and Henry late in 1946:
It is understood and agreed that any policies that Henry * * * has on Joseph * * * and any policies that Joseph * * * has on Henry * * * shall go to the corporation in the event of the death of either of them and this money is to be used by the corporation to buy out of the interest of the party that dies.
These policies are the ones that the corporation pays the premiums on.
This will apply to any policies that may be bought in the future.
The corporate minutes include the following:
A special meeting of the stockholders and directors of J. S. Prunier & Sons, Inc., was held at the office of the corporation, on Thursday, November 2, 1950 at 7:30 P.M.
On motion duly made and seconded, the following was proposed and agreed upon and made part of the by-laws:
It was agreed by and between Joseph E. Prunier, Vice-President and Henry E. Prunier, President and Treasurer and present stockholders that the fair value of the Corporation stock is: ONE HUNDRED AND TEN THOUSAND DOLLARS (110,000.00), and it is their desire that this be the value used should a stockholder sever ; is connection with the corporation, or in the event of death of either that the corporation will purchase the interest of the deceased party at said value, with the insurance money.
It was also voted, at said meeting that both Joseph E. and Henry E. Prunier would issue each five of their shares to Irene M. Prunier, Clerk.
In witness whereof they have executed this agreement, on this third day of November 1950.
(sgd.) Joseph E. Prunier Vice-Pres. (sgd.) Henry E. Prunier President & Treas.
Witness: (sgd.) Omer E. Prunier
Aside from the above-mentioned agreement between Joseph and Henry as to the fair value of the corporation's stock on November 2, 1950, the record is silent as to its value on that or any other date.
From at least the beginning of 1946 the corporation paid premiums on the policies on the lives of Henry and Joseph. During 1950 it paid premiums of $3,854.25 on policies on the life of Henry and premiums of $3,971.66 on policies on the life of Joseph. These sums were carried in a ledger account on the corporation's books entitled ‘Corporation Insurance on officers— Premium account.’ The corporation claimed no deduction for premiums paid, but referred to the payments in the surplus adjustments on Schedule M as:
8. Insurance premiums paid on the life of any officer or employee where the corporation is directly or indirectly a beneficiary. * * *
When the policies were written, Henry and Joseph informed the agent of the substance of the written agreements which the policies were to carry out. They intended that, in the event of the death of either, the corporation should be the owner of the proceeds of the policies on the life of the deceased party for a single specific purpose, namely, to use the proceeds to purchase the stock interest of the deceased party in the corporation at a price agreed upon by them prior to the death of either.
In determining the deficiencies in question the respondent determined that the premiums paid by the corporation during 1950 on the policies on the lives of Joseph and Henry constituted taxable income to them, respectively.
OPINION
Withey, Judge:
Where a corporate employer pays insurance premiums on the life of an officer or employee whose estate or family is the beneficiary, the premiums are subject to tax as part of the employee's compensation. George Matthew Adams, 18 B.T.A. 38l; N. Loring Danforth, 18 B.T.A. 1221; Frank D. Yuengling, 27 B.T.A. 782, affd. (C.A. 3) 69 F.2d 971; Commissioner v. Bonwit, (C.A. 2) 87 F. 2d 764, certiorari denied 302 U.S. 694, affirming in part and reversing in part Paul J. Bonwit, 33 B.T.A. 507. They are in turn deductible as such by the corporate employer. Berizzi Brothers Co., 16 B.T.A. 1307. Similar reasoning leads to the possibility of taxation as dividends where the insured is a stockholder as well as an officer or employee. Casper Ranger Construction Co., 1 B.T.A. 942; Paramount-Richards Th. v. Commissioner, (C.A. 5) 153 F.2d 602; Oreste Casale, 26 T.C. 1020, on appeal C.A. 2. On the other hand, where the corporation is directly or indirectly a beneficiary under the policy, the premiums are not deductible by the corporation, section 24(a)(4), Internal Revenue Code of 1939,
because in the nature of an investment of corporate capital. See Merrimac Hat Corporation, 29 B.T.A. 690. And the premiums are not chargeable as income to the officer, employee, or stockholder. See O.D. 627, 3 C.B. 104.
SEC. 24. ITEMS NOT DEDUCTIBLE.(a) GENERAL RULE.— In computing net income no deduction shall in any case be allowed in respect of—(4) Premiums paid on any life insurance policy covering the lifeof anyofficer or employee, or of any person financially interested in any tradeor business carried on by the taxpayer, when the taxpayer is directly orindirectly a beneficiary under such policy; * * * (Emphasis added.)
If a corporation pays the premiums on an individual life insurance policy carried on the life of one of its officers or employees who is permitted to designate the beneficiary and in which the corporation is not in any way a beneficiary, premiums so paid will, in the absence of satisfactory evidence to the contrary, be presumed to constitute taxable income to such officer or employee.
There is no dispute between the parties with respect to the foregoing general principles. The controversy is as to which of those principles is applicable here.
The petitioners take the position that by virtue of the agreements in 1946 and 1950 respecting the disposition to be made of the proceeds from policies on the lives of Joseph and Henry the corporation was, at all times material herein, the beneficial owner of the insurance policies and upon the death of the insured was entitled to have the proceeds paid to it. They contend that, such being the situation, the applicable and controlling principle is that no income inures to the insured employees from premium payments where the corporation is the beneficiary and owner of the insurance policies. The respondent takes the position that the agreements were merely agreements between Joseph and Henry, who owned substantially all of the outstanding capital stock of the corporation; that upon the death of either, the survivor would devote the proceeds he received from the insurance on his brother's life to the purchase of the deceased brother's stock at a price based solely on their desire; and that by virtue of the agreements, the corporation merely became the conduit through which the desired result would be accomplished. He contends that under such circumstances the benefits resulting from the insurance policies will inure directly to Joseph and Henry, that the payment of premiums on the policies by the corporation constituted an application by Joseph and Henry of corporate funds for their personal benefit, and that the decision in the instant cases should be controlled by the principle that premiums paid by a corporation on insurance on the lives of officers or employees where the corporation is not a beneficiary constitute taxable income to the insured.
Beginning in 1942 and continuing into 1950, the taxable year involved herein, Joseph obtained policies of insurance totaling $45,000 on his life. During 1950, and for several years prior thereto with respect to the policies obtained prior to 1950, the beneficiary of the policies was his brother, Henry. Further, as to the earliest policies totaling $10,000, Henry was the possessor of the exclusive right to change the beneficiary. Likewise, beginning in 1942 and continuing into 1950, Henry obtained policies of insurance totaling $45,000 on his life. During 1950, and for several years prior thereto with respect to the policies obtained prior to 1950, the beneficiary of the policies was his brother, Joseph. Further, as to the earliest policies totaling $10,000, Joseph was the possessor of the exclusive right to change the beneficiary.
To the close of 1950, the corporation had never been named in any of the policies, or by endorsement thereto, as beneficiary. By endorsements in May 1952, or more than 16 months after the close of the taxable year in question, the corporation was named beneficiary of each of the policies, Henry, his executors, or administrators, were designated as the possessor of the exclusive right to change the beneficiary of the policies issued on Joseph's life, and Henry was designated as the possessor of the exclusive right to change the beneficiary of the policies issued on his life. The endorsements in May 1952 followed the respondent's examination of the tax liability of the petitioners which terminated in the determination of the deficiencies in controversy.
From a consideration of the agreement between Joseph and Henry late in 1946 in connection with the action taken at the stockholder's meeting on November 2, 1950, and the other evidence of record, we are of the opinion, and have found as a fact, that Joseph and Henry intended that, in the event of the death of either, the corporation should be the owner of the proceeds of the policies on the life of the deceased party and that such ownership should be for the sole purpose of purchasing the stock interest of the deceased party in the corporation at a price which had been agreed upon by them prior to the death of either. While it is true that the agreement made in 1946 recites no specific value of the stock of the corporation, it makes clear that the proceeds from the insurance on the life of the party which might die were to be used by the corporation to buy the interest of the deceased party in the corporation. We see nothing in that agreement to indicate that some amount less than all of the proceeds was to be employed for that purpose. At the time the agreement was entered into, only $5,000 of insurance had been obtained by each. However, in the latter part of December 1946, Joseph and Henry each applied for additional insurance on his life and by the end of January 1947 additional policies of insurance totaling $15,000 had been issued to each. On November 2, 1950, on which date a stockholders' meeting was held at which the corporation's stock was valued at $110,000, or $244.44 a share, Joseph and Henry each made application for additional insurance in the amount of $25,000. By the following December 8, policies had been issued to them in the amounts applied for. This brought the total amount of insurance on the life of each to $45,000. But, on the basis of a value of $244.44 per share for the corporation's stock, the value of the 220 shares owned by each, Joseph and Henry, was approximately $53,775, or approximately $8,775 in excess of the amount of insurance on their respective lives. Obviously if either Joseph or Henry had died after November 2, 1950, the proceeds from the insurance on his life would have been substantially insufficient to pay for all of his stock at the price per share which they had agreed upon. And, of course, there would be no part of the proceeds remaining which the corporation could retain.
In view of what had been said above, it appears that if Joseph or Henry had died during the taxable year, the corporation would not have been enriched by receiving the proceeds from the insurance policies on the life of the deceased and using them to purchase stock he had owned in the corporation. The corporation's indebtedness to creditors would have remained undiminished, and while the corporation would have eliminated at least the greater part of the deceased's ownership interest in it, represented by his stock, the proportional interest of the surviving stockholder, or stockholders, thereby would have been greatly increased. In this situation and since the record does not otherwise indicate any benefit which might flow to the corporation from the purchase of a deceased insured's stock interest, we conclude that during the taxable year the corporation was neither the beneficial owner nor the beneficiary of the insurance policies on the lives of Joseph and Henry involved here.
The record is not entirely clear as to whether under the agreements of 1946 and November 1950, the corporation, upon the death of Joseph or Henry was obligated to purchase all of his stock in it, or was obligated to purchase only so much of it as the proceeds of the insurance on his life would pay for at an agreed price. However, we think that is immaterial since the corporation was obligated to use all of the proceeds it might receive to purchase stock.
By providing that, if either of them should die, the proceeds of the insurance on his life should be devoted to the purchase by the corporation of his stock at a previously agreed upon value, irrespective of how much less the actual value of the stock might be, Joseph and Henry created an arrangement whereby the estate of the deceased would be assured of receiving for stock of the deceased the entire amount of the proceeds from the insurance on the life of the deceased. Further, the survivor, without any cost to him, would have his proportional interest in the corporation so greatly increased that he would become by far, the dominant stockholder of the corporation with its going business. In addition he would have the power to name anyone he wished as the beneficiary of the insurance of his life. Such being the situation at the close of 1950, we are of the opinion that Joseph and Henry each had interests in the policies of insurance on their lives that were of such magnitude and of such value as to constitute them direct or indirect beneficiaries of the policies. Cf. Ernest J. Keefe, 15 T.C. 947.
Since it is neither shown nor claimed that the endorsements made on the polices in May 1952 were intended to be retroactive and since the year 1952 is not before us, we express no opinion as to the effect of those endorsements.
Having heretofore concluded that in 1950 the corporation was not a beneficiary of the insurance policies here involved but that Joseph and Henry were direct or indirect beneficiaries of the policies, we are of the opinion that the respondent's determinations that the premiums paid on the policies of insurance on their respective lives constituted taxable income to them, respectively, were correct.
Reviewed by the Court.
Decisions will be entered for the respondent.
OPPER, J., dissenting: It is not clear to me whether the Opinion charges petitioners with income because the corporation was not expressly named the beneficiary of the policy; or because, even if it had been, it was the stockholders and not the corporation that were the true beneficiaries.
If the former, it seems to me to do violence to the concept that substance rather than form is the touchstone of most tax problems. Here the corporation paid the premiums, its interest in the policies was entered on the corporate minutes and, as I read the governing Massachusetts law, it could under these circumstances apply to a court of equity to collect the proceeds. Massachusetts Lino-typing Corporation v. Fielding, 312 Mass. 147, 43 N.E. 2d 521. See also Brierly v. Equitable Aid Union, 170 Mass. 218, 48 N.E. 1090; Handrahan v. Moore, 332 Mass. 300, 124 N.E.2d 808.
It is true, of course, that the stockholders, or at least one of them, would benefit when the corporation collected the insurance proceeds. But to say that the purchase agreement made the stockholders the beneficiaries under the policies seems to me to ignore unjustifiably the corporate existence. It is difficult to think of any case where the stockholders do not indirectly benefit when the corporation receives funds. It is likewise true that in this case the corporation would in all probability be required to use the proceeds for the purpose to which, under the corporate minutes, they were to be devoted.
But this is not to say that the corporation would not thereby correspondingly benefit. A corporation's purchase of its own stock can be viewed as a corporate purpose. Dill Manufacturing Co., 39 B.T.A. 1023; Gazette Pub. Co. v. Self, (E.D., Ark) 103 F.Supp. 779, and places in the treasury a corporate asset. See United States v. Anderson, Clayton & Co., 350 U.S. 55. And I do not read the record as indicating, as the majority appear to do, that the value of the stock would necessarily be less than the amount petitioners agreed upon. Although the record contains no evidence of actual value, every compulsion of self-interest could cause these petitioners to arrive at a value as nearly correct as possible since neither knew whose estate would receive the payment.
The present result seems to me to destroy the symmetry of the pattern now designed for taxing corporate life insurance. This corporation, being at least indirectly a beneficiary, see Ernest J. Keefe, 15, T.C. 947, should not be permitted to deduct the premiums even though the insured is an officer or employee. Sec. 24(a)(4), I.R.C. 1939. If and when the proceeds are collected and distributed, the stockholders would, in the absence of the buy-sell agreement, be taxable upon the distribution as a dividend. Edwin Lindsey Cummings, 28 B.T.A. 1045, affd. (C.A. 1) 73 F.2d 477; Delia B. Golden, Executrix, 39 B.T.A. 676, affd. (C.A. 3) 113 F.2d 590; Isaac May, 20 B.T.A. 282. And of course, even in the absence of such an agreement, the corporation could always agree subsequently to buy up the stock of a deceased stockholder. If that prior agreement had not existed here, I wonder whether that would make all the difference.