*2154 Certain distributions by a corporation to its stockholders held to constitute taxable dividends to the distributees.
*282 These proceedings involve proposed deficiencies in petitioners' income taxes for the calendar year 1923 as follows:
| Isaac May | $351.81 |
| S. N. Kuttner | 70.05 |
| Max M. Kuttner | 132.38 |
The one issue common to each of the proceedings is whether certain amounts paid to each of the petitioners during 1923 by the Rome Furniture Co., of which they were stockholders, constituted taxable *283 dividends or were exempt from taxation as proceeds of a life insurance policy. The proceedings were consolidated for hearing and decision.
FINDINGS OF FACT.
The petitioners are individuals residing at Rome, Ga., and during 1923 were stockholders of the Rome Furniture Co.
During 1919 the Rome Furniture Co. procured a life insurance policy in the amount of $50,000 on the life of its president, F. L. Forster, paying the premiums thereon and charging the same to general expenses, and naming itself as sole beneficiary. On January 6, 1920, the*2155 Rome Furniture Co. increased Forster's salary to $25,000 and required him thereafter to pay all premiums due on the insurance policy.
During 1921 an agreement was entered into between the Rome Furniture Co., as party of the first part, and Forster, as party of the second part, the material provisions of which are as follows:
WHEREAS, Heretofore, to-wit, on the 10th day of April, 1919, the said party of the first part procured a policy of insurance upon the life of party of the second part, in which party of the first part herein was named as beneficiary, said policy of insurance being with the Mutual Life Insurance Company of New York, and being No. 2587616; and -
WHEREAS, It is desirable that the interests of the party of the first part and party of the second part in said policy of insurance, upon the death of the party of the second part, shall be fixed and determined prior to the death of party of the second part;
Now, THEREFORE, In consideration of the premises, and of the continuance of the said policy of insurance by party of the first part and the consideration of the payment of the premiums thereon being consented to by party of the second part, he being a stockholder*2156 in said Company, and of the mutual promises each to the other hereinafter contained, it is agreed by and between said parties that upon the death of the said party of the second part, said party of the first part, its successors or assigns, shall pay from the proceeds of said policy of insurance to the administrators, executors or assigns, of party of the second part, the sum of Twenty Thousand Dollars ($20,000), which said sum shall be and become the property of the Estate of the said party of the second part herein, and shall be due and payable immediately upon the collection thereof by party of the first part; it being agreed that in the collection of said sum of Twenty Thousand Dollars ($20,000), under said policy, the said party of the first part is acting as Agent of the Estate of said party of the second part, the title and ownership of said sum being vested immediately in said Estate of said party of the second part.
Party of the first part further agrees to continue and keep in full force and effect said policy of insurance and to pay all premiums due thereon during the life of party of the second part, and in the event that it shall fail so to do party of the second part*2157 may pay such premiums, and the sum then due his Estate as aforesaid shall be the sum of Twenty Thousand Dollars plus such amounts as he shall have paid as premiums upon said policy, with interest upon said sums at the rate of 8% per annum from the date of such payments, compounded annually, which shall be held and deemed to be entire and in complete *284 satisfaction of all interest of said party of the second part in and under said policy of insurance.
* * *
The remainder of the benefits due under said policy of insurance, after deducting the sums due said party of the second part, as hereinabove stated, shall be and become the property of the party of the first part, to be disbursed among the stockholders of party of the first part, excepting and providing, however, that no part hereof shall inure to the benefit of any of the stock now held or owned by party of the second part, no matter to whom the same may have been transferred by party of the second part. The provisions of this paragraph of this contract being attached to the stock now standing on the books of said Company in the name of party of the second part, and upon each Certificate of party of the second part*2158 shall be endorsed the following: "This stock subject to the distribution agreement of date day of , 1921, with reference to Insurance Policy No. 2587616, Mutual Life Insurance Company of New York," and such endorsement shall be entered upon all Certificates of stock issued upon any transfer of the stock of party of the second part, until such time as this contract shall have terminated, either by the surrender of said policy, as hereinabove provided, "on the death of party of the second part and the distribution of the benefits of said policy, as in this contract provided, but the same shall be disbursed and distributed among the other stockholders of said Company in proportion to their respective holdings at the death of the said party of the second part, or at the date of the surrender of said policy. In said distribution, the balance of the said benefit under said policy coming to the party of the first part, the stock now held by the said party of the second part and standing in his name on the books of said Company and the transferees thereof, as hereinabove provided, shall not be considered and computed as an outstanding part of the capital stock of said Company in such distribution.
*2159 In the event that the directors of party of the first part shall desire to retain said balance for use of party of the first part and not distribute the same to the stockholders, as hereinbefore provided then such distribution shall be made as a book entry and the stockholders entitled, as above provided, to said sum, shall be credited with their respective amounts thereof, and the same shall be treated as a loan by them to party of the first part, upon which they shall be entitled to receive the sum of Eight Per Cent (8%) per annum, payable annually, until such time as the said Directors may elect to pay them the sums due in accordance with said distribution."
Nothing in this contract contained shall be construed or held as a waiver of any of the rights of party of the second part as a stockholder in said Company as to any of the assets or profits of said Company, other than of the balance of the said benefits received under said policy by said Company, as hereinabove stated.
* * *
At a meeting of the board of directors of the Rome Furniture Co. held February 15, 1921, Forster's salary for the ensuing year was fixed at $8,000 and "such additions thereto as necessary to take*2160 care of the premium to become due on life insurance policy carried on himself."
The following is an extract from the minutes of the directors' meeting of the Rome Furniture Co. held January 19, 1922:
It was suggested that S. N. Kuttner be named as Trustee to hold the insurance policy which the company carried on the life of F. L. Forster and to *285 carry out the agreement as entered into between the company and Mr. Forster and that the balance of $8,422.02 to Mr. Forster's credit, and on which he paid the income and profits taxes for 1920, be set aside in a special account and used for the payment of premiums on this policy. Mr. May made motion that this suggestion be adopted, duly seconded and on vote was carried.
The insured, F. L. Forster, died February 23, 1923. Soon thereafter the Rome Furniture Co. received the proceeds from the life insurance policy amounting to $50,347.39, and, in pursuance of the above agreement and without further corporate action, made the following credits in its books:
| Address | Shares | Amount | |
| held | |||
| Estate of F. L. Forster, deceased | $20,000.00 | ||
| Stockholders | |||
| Isaac May | Rome, Ga | 145 | 7,652.91 |
| M. M. Kuttner | Rome, Ga | 90 | 4,750.02 |
| S. N. Kuttner | Rome, Ga | 90 | 4,750.02 |
| B. C. Yancey | Rome, Ga | 90 | 4,750.02 |
| Mrs. E. W. Willingham | Rome, Ga | 40 | 1 2,111.12 |
| Mrs. J. L. Sulzbacker, Trustee | Rome, Ga | 30 | 1,583.34 |
| Mrs. L. H. Schund | Rome, Ga | 30 | 1,583.34 |
| J. P. Broyles | Rome, Ga | 30 | 1,055.56 |
| Charles Forster | Rome, Ga | 20 | 263.89 |
| Undivided profit | Rome, Ga | 5 | 1,847.17 |
| 540 | 30,347.39 |
The respondent has determined that the amounts paid to each of the petitioners out of the proceeds of the life insurance policy as above shown are taxable to them as dividends from the Rome Furniture Co.
OPINION.
SMITH: The petitioners contend that the disputed amounts paid to them by the Rome Furniture Co. were proceeds of a life insurance policy paid upon the death of the insured and are therefore within the specific statutory exemption. Section 213 of the Revenue Act of 1921 provides in part:
That for the purposes of this title (except as otherwise provided in section 233) the term "gross income" -
(a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal service * * * of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, *2162 securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * *
(b) *286 (b) Does not include the following items, which shall be exempt from taxation under this title:
(1) The proceeds of life insurance policies paid upon the death of the insured.
The petitioners contend that by virtue of the agreement entered into between Forster and the Rome Furniture Co. during 1921 they, the petitioners, and other individuals were the actual beneficiaries under the insurance policy and that the Rome Furniture Co. in receiving and disbursing the proceeds of the policy acted merely as trustee or agent for the beneficiaries. The respondent contends, on the other hand, that the Rome Furniture Co. was the beneficiary and that it received the proceeds of the policy and distributed them to the individual stockholders as a dividend. The respondent makes the alternative contention that the amounts distributed to the petitioners constitute "ordinary income" taxable to them at both normal and surtax rates upon the basis of a gain measured by the difference between their pro rata interests in the premiums*2163 paid on the policy by the company and the amounts received by them out of the proceeds of the policy. Respondent has moved for an increase in the proposed deficiencies to be computed upon that basis, should the Board sustain the alternative contention.
We can not agree with petitioners' contention that they, rather than the Rome Furniture Co., were the beneficiaries under the insurance policy. The insurance contract named the company as sole beneficiary and it does not appear that the policy was ever changed in this respect. It is not shown that the insurance company ever approved or was ever given notice of the collateral agreement between the insured and the named beneficiary. In any case, the consent of the insurer was essential to a valid change of beneficiary and there is no evidence before us that such consent was given. The effect of the agreement, as we interpret it, was no more than an assignment by the corporation of its benefits under the insurance policy to the petitioners and other stockholders. Apart from the assignment, the individual stockholders, so far as is shown, had no rights whatever in the proceeds of the policy. The premiums had all been paid either*2164 directly or indirectly by the company. The stockholders individually were not even parties to the collateral agreement between the company and the insured.
Looking to the agreement itself, it specifically provides that that part of the proceeds of the policy not belonging to and immediately to be paid over to the insured's estate "shall be and become the property of the party of the first part [the company], to be disbursed among the stockholders."
Would the proceeds of the policy in the hands of the company have been subject to the rights of creditors of the company? At *287 least to the extent of the amount of premiums paid by the company out of corporate funds, we think that creditors would have had a valid claim on the proceeds of the policy. The amount of these premiums, however, is not shown.
If, then, the corporation received a part of the proceeds of the policy as its own funds and later distributed it to certain of the stockholders in proportion to their stockholdings, did such distribution constitute a taxable dividend to the distributees? Section 201(a) of the Revenue Act of 1921 defines a dividend, with certain exceptions not material here, as, "any*2165 distribution made by a corporation to its shareholders or members, whether in cash or in other property, out of its earnings or profits accumulated since February 28, 1913 * * *."
At this point a serious question might arise as to whether, in view of the reasoning of the Supreme Court in , the proceeds of a life insurance policy in the hands of the beneficiary may be said to constitute "earnings or profits" out of which dividends could be paid. We quote from the opinion in that case:
Nor do we find any difficulty with the expression in paragraph (b) which exempts proceeds of life insurance from gross income. The word is used, not to indicate that they would be otherwise included in the income to be taxed, but only to make clear that the gross does not include them.
* * *
* * * The benefit to be gained by death had no periodicity. It is a substitution of money value for something permanently lost, either in a house, a ship, or a life. Assuming, without deciding, that Congress could call the proceeds of such indemnity, income, and validly tax it as such, we think that, in view of the popular*2166 conception of the life insurance as resulting in a single addition of a total sum to the resources of the beneficiary, and not in a periodical return, such a purpose on its part should be express, as it certainly is not here.
Looking further to the statute, however, we find the provision in subdivision (b) of section 201 that "For the purposes of this Act every distribution is made out of earnings or profits, and from the most recently accumulated earnings or profits, to the extent of such earnings or profits accumulated since February 28, 1913 * * *."
The evidence before us does not disclose what earnings, if any, accumulated since February 28, 1913, the company had on hand at the time of the distribution in question to the petitioners. If there were any such earnings on hand at the date of distribution, the recipients of the distributions would be liable to tax upon them as dividends. If there had been no such earnings or profits or if such earnings or profits had been less than the amount distributed, then, interpreting *2167 , to mean that the proceeds of a life insurance policy are not income, *288 section 201(c) would apply to reduce the basis for the purpose of determining the gain or loss to the distributees upon the sale of their shares of stock. Upon the evidence this disposition of the question is not open to us.
The respondent's determination that the petitioners are taxable upon the distribution results in no inequities for the corporation. It had paid, either directly or indirectly, all the premiums on the insurance policy presumably out of its earnings that would otherwise have been taxable to the petitioners upon distribution. The respondent's determination, we think, must be approved.
Judgment will be entered for the respondent.
Footnotes
1. This amount was later transferred to undivided profits.
The amounts credited to individuals as above shown were paid to them by checks of the Rome Furniture Co., dated November 13, 1923. ↩