*1498 Premiums paid in 1929 and 1930 on life insurance policies (1) on the life of an individual, the principal personality of a corporation acting as sales agent of the petitioner, and (2) on the life of an individual sales agent, of which the petitioner or its subsidiary was the beneficiary, are not legal deductions from gross income.
*691 These proceedings, consolidated for hearing, involve deficiencies in petitioner's income tax for the calendar years 1929 and 1930 in the amounts of $1,643.90 and $1,325,44, respectively. The question at issue, which is common to both years, is whether premiums paid on policies of insurance on the lives of two individuals, one of whom was a sales agent and the other the principal officer or employee of a corporation acting as sales agent for the petitioner's manufactured products, are deductible as ordinary and necessary business expenses. The parties have filed a written stipulation setting forth most of the essential facts.
FINDINGS OF FACT.
The petitioner is a Massachusetts corporation, engaged in manufacturing*1499 hats at Amesbury. During the years 1929 and 1930 it was affiliated with several subsidiary companies, including Wm. Knowlton & Sons Co., hereinafter referred to as the Knowlton Co., which is also engaged in manufacturing hats, all of the stock of which was owned by the Merrimac Co., a holding company, which in turn was owned 100 percent by the petitioner.
Under date of July 28, 1926, the petitioner entered into a contract with Bates Thompson, Inc., whereby it appointed Bates Thompson, Inc., its sole and exclusive selling agent for its entire output of men's, boys' and children's fur and wool hats.
Bates Thompson, Inc., was a corporation acting as independent contracting sales agents, with principal offices in New York City. It sold hats to the general trade for various manufacturers, including the petitioner. J. S. Thompson was an active and important personality in the Bates Thompson, Inc., organization. He was also the owner of 80 shares out of the petitioner's outstanding stock in the amount of 41,500 shares. He was not an officer or a director of the petitioner, or of any of its affiliated companies. The contract of July 28, 1926, was extended by agreement to cover*1500 both of the taxable years 1929 and 1930. There was no contract between J. S. Thompson as an individual and the petitioner or its affiliated companies.
Prior to 1929 the petitioner, believing that the services of J. S. Thompson to Bates Thompson, Inc., were necessary and vital to the success of its, the petitioner's, business, took out policies of insurance on his life in the face amount of $50,000. The petitioner was named as beneficiary of such policies. During 1929 and 1930 the petitioner paid net premiums on such policies in the amounts of $121 and $107, respectively.
On November 1, 1927, the Knowlton Co. entered into a contract with Dwight Rockwell, an individual, whereby the Knowlton Co. *692 appointed Rockwell its sole and exclusive selling agent for that company's entire output of ladies' finished hats. At the same time, the petitioner entered into a similar contract with Rockwell with respect to its entire output of ladies' finished hats. These contracts were extended to cover the years 1929 and 1930.
Rockwell was an independent contracting sales agent, with principal offices in New York City. He sold hats to the general trade for various manufacturers, *1501 including the petitioner and the Knowlton Co. Rockwell was the active head and the most important personality in his sales organization. He had several salesmen working for him. He was also a stylist and designer and under the terms of the contracts referred to above with the petitioner and the Knowlton Co. was obligated to render services to them of that character. About 80 percent of the Knowlton Co.'s products and about 50 or 60 percent of the petitioner's products were marketed through Rockwell's organization. Rockwell also purchased a substantial part of the materials for the petitioner and the Knowlton Co.
Rockwell was an outstanding personality in his business field. The petitioner in securing his services as its selling agent paid out a considerable sum of money in order to cancel its contract with another sales agent, As compensation under the contract of November 1, 1927, with the Knowlton Co., Rockwell was to receive:
(1) Minimum payments at the rate of $65,000, per year from November 1st to October 31st, payable in equal monthly installments, on December 10th and the 10th day of each month thereafter during the term of the contract.
(2) Five per cent, of the*1502 amount by which the annual net sales (November 1st to October 31st) of the Knowlton Company, of Ladies' finished hats (including therein for the purposes of this calculation, the annual net sales of ladies' finished hats of the Brookdale Company) exceed $2,000,000. By net sales is meant the total sales billed, less returns, allowances, etc.
(3) Twenty per cent. of the annual net profits of the Knowlton Company for the calendar and fiscal years of 1928 and 1929, and ten-twelfths of such twenty per cent. for the calendar year 1930.
* * *
(4) In the event that in any of the calendar years 1928, 1929 and 1930 the Knowlton Company shall make $40,000. or more net profits, as above defined, then it agrees that your compensation, from the sources above set forth (in clauses 1, 2 and 3) shall equal in the aggregate at least five per cent. of the net sales of ladies' finished hats by the Knowlton Company and the Brookdale Company.
Under his contract with the petitioner, Rockwell was to receive:
(1) Five per cent. of the net sales of ladies' finished hats, payable on the 15th of each month for sales during the preceding month. We are to have the right to accept or reject any sales, *1503 to fix prices, terms of sale, etc. By net sales is meant the total sales billed, less returns, allowances, etc.
We guarantee that such five per cent. shall be at least $25,000. per annum.
*693 In addition he was to receive a fee of $10,000 provided the petitioner should make net profits of $300,000 or more. If the profits amounted to less than $300,000, further adjustments were to be made in respect of the fee.
Prior to 1929 the petitioner and the Knowlton Co., believing that the services of Rockwell were necessary and vital to the success of their business, took out policies of insurance on his life, of which they were the beneficiaries, in the face amount of $300,000. There was one policy of $100,000 of which the Knowlton Co. was the beneficiary and policies of $200,000 of which the petitioner was the beneficiary. During 1929 and 1930 the petitioner paid net premiums on such policies in the amounts of $5,371.60 and $4,104.51, respectively.
In its consolidated income tax returns for 1929 and 1930 the petitioner claimed the deduction of the premiums paid in those years on the above described life insurance policies as ordinary and necessary business expenses. *1504 The Commissioner disallowed the deduction of the premiums. Such disallowance resulted in $1,103.70 of the total deficiency of $1,634.90 asserted for the year 1929, and $1,017.09 of the total deficiency of $1,325.44 asserted for the year 1930.
OPINION.
SMITH: The only question at issue is whether premiums paid by the petitioner and its affiliated company in 1929 and 1930 on life insurance policies of which they were the beneficiaries on the lives of two individuals, one of whom was the principal officer of a corporation acting as the petitioner's sales agent, and the other of whom was an individual sales agent, are deductible from gross income as ordinary and necessary expenses of doing business.
Section 22(b) of the Revenue Act of 1928 provides in part as follows:
(b) Exclusions from gross income. - The following items shall not be included in gross income and shall be exempt from taxation under this title:
(1) LIFE INSURANCE. - Amounts received under a life insurance contract paid by reason of the death of the insured, whether in a single sum or in installments * * *
Section 24(a) of the same act provides in part:
(a) General rule. - In computing net income*1505 no deduction shall in any case be allowed in respect of -
* * *
(4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy.
*694 The petitioner makes two contentions in these proceedings. First, that the life insurance premiums paid are deductible from gross income as ordinary and necessary expenses under section 23(a) of the Revenue Act of 1928; second, that the inhibition of section 24(a)(4) of the taxing statute does not prevent such deduction.
It is apparent from the evidence in these proceedings that the petitioner was of the opinion that it was advisable for it to insure itself against loss in case of the death of Thompson or Rockwell, or both, and as a means of insuring itself against such contingency took out insurance policies on the lives of these individuals, We may therefore assume that the premiums paid constitute a necessary expense of doing business.
There is the further consideration, however, as to whether the claimed expense was an "ordinary" expense*1506 within the meaning of the statute; for it is to be observed that the statute permits the deduction of "ordinary and necessary expenses" and not of ordinary or necessary expenses. The word "and" is not to be construed as a disjunctive. . We are of opinion that the life insurance premiums paid do not constitute "ordinary" expenses within the meaning of the statute, for a life insurance contract partakes of the nature of a capital investment. One insuring against death is insuring against a certain event. A life insurance contract is different from a fire insurance or casualty contract. If premiums are paid in accordance with the terms of a life insurance contract, the beneficiary will in due course receive the proceeds. Under all of the income tax acts the proceeds of life insurance policies have been exempted from income tax. Correlatively, Congress has provided, in all of the income tax acts beginning with that of 1916 (see section 32 of the Revenue Act of 1916 added by section 1211 of the Revenue Act of 1917), that premiums paid on life insurance policies under certain circumstances shall not be allowed as deductions*1507 from gross income.
But even if the petitioner has cleared the first hurdle, we are of the opinion that it has not shown that the inhibition of section 24(a)(4) of the Revenue Act of 1928 is not applicable to it. In the first place, it is to be noted that Thompson was a stockholder of the petitioner, albeit he was the owner of only 80 shares out of 41,500 shares. Clearly, a stockholder is a person financially interested in a trade or business. Under his contract with the petitioner and its subsidiary, Rockwell was to receive a share of the profits, and, in any event, he was to receive minimum payments at the rate of $65,000 per year, payable in equal monthly installments. We think that he was financially interested in the trade or business of the petitioner and of its subsidiary. Cf. ; affd., . We are of opinion that the inhibition of *695 section 24(a)(4) of the Revenue Act of 1928 is applicable to the life insurance premium payments made by the petitioner in the taxable years.
Judgment will be entered for the respondent.